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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, Denali Therapeutics (NASDAQ:DNLI) shareholders have done very well over the last year, with the share price soaring by 189%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
In light of its strong share price run, we think now is a good time to investigate how risky Denali Therapeutics' cash burn is. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Denali Therapeutics 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 Denali Therapeutics last reported its balance sheet in September 2020, it had zero debt and cash worth US$961m. In the last year, its cash burn was US$150m. That means it had a cash runway of about 6.4 years as of September 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Well Is Denali Therapeutics Growing?
One thing for shareholders to keep front in mind is that Denali Therapeutics increased its cash burn by 420% in the last twelve months. That's bad enough, but the operating revenue drop of 84% points to a period of uncertainty and, quite potentially, heightened risk for holders." Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 Denali Therapeutics To Raise More Cash For Growth?
Denali 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Since it has a market capitalisation of US$8.8b, Denali Therapeutics' US$150m in cash burn equates to about 1.7% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Denali Therapeutics' Cash Burn Situation?
On this analysis of Denali Therapeutics' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Denali Therapeutics has 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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. 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.
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