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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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Ascendis Pharma (NASDAQ:ASND) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Ascendis Pharma Run Out Of Money?
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. When Ascendis Pharma last reported its balance sheet in December 2020, it had zero debt and cash worth €719m. Importantly, its cash burn was €293m over the trailing twelve months. Therefore, from December 2020 it had 2.5 years of cash runway. Notably, analysts forecast that Ascendis Pharma will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Ascendis Pharma Growing?
Ascendis Pharma boosted investment sharply in the last year, with cash burn ramping by 62%. As if that's not bad enough, the operating revenue also dropped by 48%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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 Ascendis Pharma Raise Cash?
Even though it seems like Ascendis Pharma is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 €5.7b, Ascendis Pharma's €293m in cash burn equates to about 5.2% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is Ascendis Pharma's Cash Burn Situation?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Ascendis Pharma's cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Ascendis Pharma's situation. 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 Ascendis Pharma 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)
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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