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 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we’d take a look at whether CymaBay Therapeutics (NASDAQ:CBAY) shareholders should 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does CymaBay Therapeutics Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When CymaBay Therapeutics last reported its balance sheet in June 2019, it had zero debt and cash worth US$241m. Importantly, its cash burn was US$83m over the trailing twelve months. Therefore, from June 2019 it had 2.9 years of cash runway. 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.
How Well Is CymaBay Therapeutics Growing?
Notably, CymaBay Therapeutics actually ramped up its cash burn very hard and fast in the last year, by 169%, signifying heavy investment in the business. On top of that, the fact that operating revenue was basically flat over the same period compounds the concern. 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 CymaBay Therapeutics To Raise More Cash For Growth?
CymaBay Therapeutics 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. Companies can raise capital through either debt or equity. 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$395m, CymaBay Therapeutics’s US$83m in cash burn equates to about 21% of its 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 CymaBay Therapeutics’s Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought CymaBay Therapeutics’s cash runway was truly promising. While 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. Notably, our data indicates that CymaBay Therapeutics insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.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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