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, 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should CymaBay Therapeutics (NASDAQ:CBAY) shareholders be worried about its cash burn? In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is CymaBay 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. When CymaBay Therapeutics last reported its balance sheet in December 2019, it had zero debt and cash worth US$191m. Importantly, its cash burn was US$98m over the trailing twelve months. That means it had a cash runway of around 23 months as of December 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. The image below shows how its cash balance has been changing over the last few years.
How Is CymaBay Therapeutics’s Cash Burn Changing Over Time?
Although CymaBay Therapeutics had revenue of US$5.2m in the last twelve months, its operating revenue was only US$5.2m in that time period. Given how low that operating leverage is, we think it’s too early to put much weight on the revenue growth, so we’ll focus on how the cash burn is changing, instead. Over the last year its cash burn actually increased by a very significant 77%. While this spending increase is no doubt intended to drive growth, if the trend continues the company’s cash runway will shrink very quickly. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 CymaBay Therapeutics To Raise More Cash For Growth?
Given its cash burn trajectory, CymaBay Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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$90m, CymaBay Therapeutics’s US$98m in cash burn equates to about 109% of its market value. That suggests the company may have some funding difficulties, and we’d be very wary of the stock.
How Risky Is CymaBay Therapeutics’s Cash Burn Situation?
On this analysis of CymaBay Therapeutics’s cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. An in-depth examination of risks revealed 3 warning signs for CymaBay Therapeutics that readers should think about before committing capital to this stock.
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