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Is Rhythm Pharmaceuticals (NASDAQ:RYTM) In A Good Position To Invest In Growth?

·4 min 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Rhythm Pharmaceuticals (NASDAQ:RYTM) shareholders should be worried about its 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.

See our latest analysis for Rhythm Pharmaceuticals

Does Rhythm Pharmaceuticals Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at March 2022, Rhythm Pharmaceuticals had cash of US$241m and no debt. Importantly, its cash burn was US$160m over the trailing twelve months. So it had a cash runway of approximately 18 months from March 2022. Importantly, analysts think that Rhythm Pharmaceuticals will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Rhythm Pharmaceuticals' Cash Burn Changing Over Time?

Whilst it's great to see that Rhythm Pharmaceuticals has already begun generating revenue from operations, last year it only produced US$4.6m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With the cash burn rate up 33% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Rhythm Pharmaceuticals Raise Cash?

While Rhythm Pharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Rhythm Pharmaceuticals has a market capitalisation of US$174m and burnt through US$160m last year, which is 92% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

So, Should We Worry About Rhythm Pharmaceuticals' Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Rhythm Pharmaceuticals' cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Taking an in-depth view of risks, we've identified 3 warning signs for Rhythm Pharmaceuticals that you should be aware of before investing.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.