Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for REGENXBIO (NASDAQ:RGNX) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business's cash, relative to its cash burn.
When Might REGENXBIO Run Out Of Money?
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. When REGENXBIO last reported its balance sheet in September 2019, it had zero debt and cash worth US$332m. Looking at the last year, the company burnt through US$102m. Therefore, from September 2019 it had 3.3 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
Is REGENXBIO's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because REGENXBIO actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The harsh truth is that operating revenue dropped 64% in the last year, which is quite problematic for a cash burning company. While the past is always worth studying, it is the future that matters most of all. 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 REGENXBIO Raise Cash?
Given its problematic fall in revenue, REGENXBIO shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Companies can raise capital through either debt or equity. 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).
REGENXBIO has a market capitalisation of US$1.5b and burnt through US$102m last year, which is 6.6% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is REGENXBIO's Cash Burn Situation?
As you can probably tell by now, we're not too worried about REGENXBIO's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what REGENXBIO's CEO gets paid each year.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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