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Is Oncternal Therapeutics (NASDAQ:ONCT) In A Good Position To Invest In Growth?

Simply Wall St
·4 mins read

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Oncternal Therapeutics (NASDAQ:ONCT) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Oncternal Therapeutics

Does Oncternal Therapeutics Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Oncternal Therapeutics last reported its balance sheet in September 2019, it had zero debt and cash worth US$23m. Importantly, its cash burn was US$16m over the trailing twelve months. That means it had a cash runway of around 17 months as of September 2019. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

NasdaqCM:ONCT Historical Debt, March 18th 2020
NasdaqCM:ONCT Historical Debt, March 18th 2020

How Well Is Oncternal Therapeutics Growing?

Notably, Oncternal Therapeutics actually ramped up its cash burn very hard and fast in the last year, by 103%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 14%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Oncternal Therapeutics has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Oncternal Therapeutics To Raise More Cash For Growth?

Oncternal Therapeutics revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.

Oncternal Therapeutics has a market capitalisation of US$51m and burnt through US$16m last year, which is 31% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Oncternal Therapeutics's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Oncternal Therapeutics's cash runway 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. On another note, Oncternal Therapeutics has 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course Oncternal 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.