We're Not Worried About Verrica Pharmaceuticals' (NASDAQ:VRCA) Cash Burn
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, Verrica Pharmaceuticals (NASDAQ:VRCA) stock is up 198% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Verrica Pharmaceuticals shareholders to consider whether its cash burn is concerning. 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'.
See our latest analysis for Verrica Pharmaceuticals
Does Verrica Pharmaceuticals Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2023, Verrica Pharmaceuticals had US$60m in cash, and was debt-free. Importantly, its cash burn was US$15m over the trailing twelve months. That means it had a cash runway of about 3.9 years as of March 2023. Importantly, though, analysts think that Verrica Pharmaceuticals will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Is Verrica Pharmaceuticals' Cash Burn Changing Over Time?
Whilst it's great to see that Verrica Pharmaceuticals has already begun generating revenue from operations, last year it only produced US$8.6m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 41% over the last year suggests some degree of prudence. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Verrica Pharmaceuticals Raise More Cash Easily?
While Verrica Pharmaceuticals is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Verrica Pharmaceuticals' cash burn of US$15m is about 6.3% of its US$241m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Verrica Pharmaceuticals' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Verrica Pharmaceuticals is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. One real positive is that analysts are forecasting that the company will reach breakeven. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, Verrica Pharmaceuticals has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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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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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