We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether CymaBay Therapeutics (NASDAQ:CBAY) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does CymaBay Therapeutics Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When CymaBay Therapeutics last reported its balance sheet in December 2019, it had zero debt and cash worth US$191m. Importantly, its cash burn was US$98m over the trailing twelve months. So it had a cash runway of approximately 23 months from December 2019. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Is CymaBay Therapeutics's Cash Burn Changing Over Time?
In the last year, CymaBay Therapeutics did book revenue of US$5.2m, but its revenue from operations was less, at just US$5.2m. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. During the last twelve months, its cash burn actually ramped up 77%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 CymaBay Therapeutics Raise Cash?
While CymaBay Therapeutics 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. 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 to 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$90m, CymaBay Therapeutics's US$98m in cash burn equates to about 109% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
So, Should We Worry About CymaBay Therapeutics's Cash Burn?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought CymaBay Therapeutics's cash runway was relatively promising. Summing up, we think the CymaBay Therapeutics's cash burn is a risk, based on the factors we mentioned in this article. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for CymaBay Therapeutics that investors should know when investing in the stock.
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)
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