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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.
So, the natural question for Kiniksa Pharmaceuticals (NASDAQ:KNSA) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.
How Long Is Kiniksa Pharmaceuticals's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Kiniksa Pharmaceuticals last reported its balance sheet in September 2019, it had zero debt and cash worth US$259m. Importantly, its cash burn was US$167m over the trailing twelve months. That means it had a cash runway of around 19 months as of September 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. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. Depicted below, you can see how its cash holdings have changed over time.
How Is Kiniksa Pharmaceuticals's Cash Burn Changing Over Time?
Kiniksa Pharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. In fact, it ramped its spending strongly over the last year, increasing cash burn by 114%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. 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.
Can Kiniksa Pharmaceuticals Raise More Cash Easily?
Given its cash burn trajectory, Kiniksa Pharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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$608m, Kiniksa Pharmaceuticals's US$167m in cash burn equates to about 27% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
So, Should We Worry About Kiniksa Pharmaceuticals's Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Kiniksa Pharmaceuticals's cash runway was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Kiniksa Pharmaceuticals CEO receives in total remuneration.
Of course Kiniksa 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.
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