We're Hopeful That Rhythm Pharmaceuticals (NASDAQ:RYTM) Will Use Its Cash Wisely
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. Indeed, Rhythm Pharmaceuticals (NASDAQ:RYTM) stock is up 114% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it's well worth asking whether Rhythm Pharmaceuticals' cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Rhythm Pharmaceuticals
How Long Is Rhythm Pharmaceuticals' Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2022, Rhythm Pharmaceuticals had US$333m in cash, and was debt-free. In the last year, its cash burn was US$174m. So it had a cash runway of approximately 23 months from December 2022. Importantly, analysts think that Rhythm Pharmaceuticals will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Rhythm Pharmaceuticals Growing?
Some investors might find it troubling that Rhythm Pharmaceuticals is actually increasing its cash burn, which is up 25% in the last year. Given that it boosted operating revenue by a stand-out 649% in the same period, we think management are simply more focussed on growth than preserving cash. Sometimes you need to spend money to make money! It seems to be growing nicely. 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 Easily Can Rhythm Pharmaceuticals Raise Cash?
While Rhythm Pharmaceuticals seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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$1.1b, Rhythm Pharmaceuticals' US$174m in cash burn equates to about 17% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Rhythm Pharmaceuticals' Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Rhythm Pharmaceuticals' revenue growth was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Rhythm Pharmaceuticals that potential shareholders should take into account before putting money into a stock.
Of course Rhythm Pharmaceuticals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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.
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