Is Nektar Therapeutics (NASDAQ:NKTR) In A Good Position To Deliver On Growth Plans?
We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Nektar Therapeutics (NASDAQ:NKTR) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Nektar Therapeutics
How Long Is Nektar Therapeutics' Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Nektar Therapeutics last reported its balance sheet in September 2023, it had zero debt and cash worth US$373m. Importantly, its cash burn was US$204m over the trailing twelve months. So it had a cash runway of approximately 22 months from September 2023. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Well Is Nektar Therapeutics Growing?
We reckon the fact that Nektar Therapeutics managed to shrink its cash burn by 50% over the last year is rather encouraging. Unfortunately, however, operating revenue declined by 7.1% during the period. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Nektar Therapeutics To Raise More Cash For Growth?
Nektar Therapeutics seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Nektar Therapeutics has a market capitalisation of US$147m and burnt through US$204m last year, which is 139% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
Is Nektar Therapeutics' Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Nektar Therapeutics' cash burn reduction was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Nektar Therapeutics that investors should know when investing in the stock.
Of course Nektar Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
