We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Pieris Pharmaceuticals (NASDAQ:PIRS) shareholders should be worried about its cash burn. 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). We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Pieris Pharmaceuticals’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2019, Pieris Pharmaceuticals had cash of US$100m and no debt. Looking at the last year, the company burnt through US$51m. That means it had a cash runway of around 23 months as of June 2019. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
Is Pieris Pharmaceuticals’s Revenue Growing?
Given that Pieris Pharmaceuticals actually had positive free cash flow last year, before burning cash this year, we’ll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company’s operating revenue moved in the wrong direction over the last twelve months, declining by 28%. 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 Easily Can Pieris Pharmaceuticals Raise Cash?
Given its problematic fall in revenue, Pieris Pharmaceuticals shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
Pieris Pharmaceuticals has a market capitalisation of US$152m and burnt through US$51m last year, which is 34% of the company’s market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
Is Pieris Pharmaceuticals’s Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Pieris Pharmaceuticals’s cash runway was relatively promising. We don’t think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. 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 Pieris Pharmaceuticals CEO receives in total remuneration.
Of course Pieris Pharmaceuticals 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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.