We're Hopeful That Zentalis Pharmaceuticals (NASDAQ:ZNTL) Will Use Its Cash Wisely
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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Zentalis Pharmaceuticals (NASDAQ:ZNTL) shareholders should be worried about its 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Zentalis Pharmaceuticals
How Long Is Zentalis Pharmaceuticals' 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 2022, Zentalis Pharmaceuticals had US$422m in cash, and was debt-free. Importantly, its cash burn was US$168m over the trailing twelve months. Therefore, from September 2022 it had 2.5 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Is Zentalis Pharmaceuticals' Cash Burn Changing Over Time?
Because Zentalis Pharmaceuticals isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 13% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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 Zentalis Pharmaceuticals To Raise More Cash For Growth?
While Zentalis Pharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Zentalis Pharmaceuticals' cash burn of US$168m is about 12% of its US$1.4b market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is Zentalis Pharmaceuticals' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Zentalis Pharmaceuticals' cash burn. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 4 warning signs for Zentalis Pharmaceuticals you should be aware of, and 1 of them is a bit concerning.
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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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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