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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, Five Prime Therapeutics (NASDAQ:FPRX) shareholders have done very well over the last year, with the share price soaring by 390%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given its strong share price performance, we think it's worthwhile for Five Prime Therapeutics shareholders to consider whether its cash burn is concerning. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Five Prime Therapeutics' Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2020, Five Prime Therapeutics had US$111m in cash, and was debt-free. In the last year, its cash burn was US$81m. So it had a cash runway of approximately 16 months from September 2020. Notably, analysts forecast that Five Prime Therapeutics will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Five Prime Therapeutics Growing?
It was fairly positive to see that Five Prime Therapeutics reduced its cash burn by 41% during the last year. Revenue also improved during the period, increasing by 8.9%. On balance, we'd say the company is improving over time. 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 Hard Would It Be For Five Prime Therapeutics To Raise More Cash For Growth?
Five Prime 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of US$900m, Five Prime Therapeutics' US$81m in cash burn equates to about 9.0% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Five Prime Therapeutics' Cash Burn Situation?
Five Prime Therapeutics appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash burn reduction quite good, but its cash burn relative to its market cap was a real positive. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Taking an in-depth view of risks, we've identified 3 warning signs for Five Prime Therapeutics 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)
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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