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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Crinetics Pharmaceuticals (NASDAQ:CRNX) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Crinetics Pharmaceuticals Have A Long Cash Runway?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at September 2019, Crinetics Pharmaceuticals had cash of US$132m and no debt. In the last year, its cash burn was US$40m. That means it had a cash runway of about 3.3 years as of September 2019. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
How Well Is Crinetics Pharmaceuticals Growing?
Notably, Crinetics Pharmaceuticals actually ramped up its cash burn very hard and fast in the last year, by 134%, signifying heavy investment in the business. As if that’s not bad enough, the operating revenue also dropped by 24%, making us very wary indeed. In light of the above-mentioned, we’re pretty wary of the trajectory the company seems to be on. 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.
How Hard Would It Be For Crinetics Pharmaceuticals To Raise More Cash For Growth?
Even though it seems like Crinetics Pharmaceuticals 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. Commonly, a business will sell new shares in itself to raise cash to 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).
Crinetics Pharmaceuticals’s cash burn of US$40m is about 6.9% of its US$574m 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.
So, Should We Worry About Crinetics Pharmaceuticals’s Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Crinetics Pharmaceuticals’s cash runway was relatively promising. 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 Crinetics Pharmaceuticals’s situation. 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 Crinetics Pharmaceuticals CEO receives in total remuneration.
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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