Here’s Why We’re Not Too Worried About G1 Therapeutics’s (NASDAQ:GTHX) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we’d take a look at whether G1 Therapeutics (NASDAQ:GTHX) shareholders should be worried about its 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.

See our latest analysis for G1 Therapeutics

How Long Is G1 Therapeutics’s Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at March 2020, G1 Therapeutics had cash of US$242m and no debt. Looking at the last year, the company burnt through US$108m. So it had a cash runway of about 2.3 years from March 2020. That’s decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

NasdaqGS:GTHX Historical Debt May 19th 2020
NasdaqGS:GTHX Historical Debt May 19th 2020

How Is G1 Therapeutics’s Cash Burn Changing Over Time?

Because G1 Therapeutics isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 37%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 G1 Therapeutics Raise Cash?

While G1 Therapeutics does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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 US$608m, G1 Therapeutics’s US$108m in cash burn equates to about 18% of its market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About G1 Therapeutics’s Cash Burn?

On this analysis of G1 Therapeutics’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 G1 Therapeutics’s situation. An in-depth examination of risks revealed 2 warning signs for G1 Therapeutics that readers should think about before committing capital to this stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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. Thank you for reading.