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 Crinetics Pharmaceuticals (NASDAQ:CRNX) 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. Let’s start with an examination of the business’s cash, relative to its cash burn.
Does Crinetics Pharmaceuticals Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Crinetics Pharmaceuticals last reported its balance sheet in June 2019, it had zero debt and cash worth US$145m. Importantly, its cash burn was US$32m over the trailing twelve months. So it had a cash runway of about 4.5 years from June 2019. There’s no doubt that this is a reassuringly long runway. 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 137%, signifying heavy investment in the business. While that’s concerning on it’s own, the fact that operating revenue was actually down 25% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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?
Crinetics Pharmaceuticals seems to be in a fairly good position, in terms of cash burn, but we still think it’s worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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 has a market capitalisation of US$413m and burnt through US$32m last year, which is 7.8% of the company’s market value. 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?
On this analysis of Crinetics Pharmaceuticals’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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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