We Think Longboard Pharmaceuticals (NASDAQ:LBPH) Can Afford To Drive Business Growth
Just because a business does not make any money, does not mean that the stock will go down. 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 Longboard Pharmaceuticals (NASDAQ:LBPH) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Longboard Pharmaceuticals
Does Longboard 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. In September 2021, Longboard Pharmaceuticals had US$113m in cash, and was debt-free. Looking at the last year, the company burnt through US$21m. So it had a cash runway of about 5.5 years from September 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
How Easily Can Longboard Pharmaceuticals Raise Cash?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).
Longboard Pharmaceuticals' cash burn of US$21m is about 20% of its US$101m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
Is Longboard Pharmaceuticals' Cash Burn A Worry?
Given it's an early stage company, we don't have a lot of data with which to judge Longboard Pharmaceuticals' cash burn. We would undoubtedly be more comfortable if it had reported some operating revenue. However, it is fair to say that its cash runway gave us comfort. To put it simply, we think its cash burn situation is totally fine given it is still developing its business. Taking a deeper dive, we've spotted 5 warning signs for Longboard Pharmaceuticals you should be aware of, and 2 of them shouldn't be ignored.
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)
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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.
