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Can Zosano Pharma (NASDAQ:ZSAN) Afford To Invest In Growth?

·3 min read

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.

So, the natural question for Zosano Pharma (NASDAQ:ZSAN) shareholders is whether they should be concerned by its rate of 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'.

Check out our latest analysis for Zosano Pharma

How Long Is Zosano Pharma's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Zosano Pharma last reported its balance sheet in September 2021, it had zero debt and cash worth US$17m. Looking at the last year, the company burnt through US$34m. Therefore, from September 2021 it had roughly 6 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Zosano Pharma's Cash Burn Changing Over Time?

Whilst it's great to see that Zosano Pharma has already begun generating revenue from operations, last year it only produced US$922k, 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. It's possible that the 18% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. 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.

How Hard Would It Be For Zosano Pharma To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Zosano Pharma to raise more cash in the future. 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.

Zosano Pharma has a market capitalisation of US$66m and burnt through US$34m last year, which is 51% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

How Risky Is Zosano Pharma's Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Zosano Pharma's cash burn reduction was relatively promising. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. Taking a deeper dive, we've spotted 7 warning signs for Zosano Pharma you should be aware of, and 3 of them are significant.

Of course Zosano Pharma 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.