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. 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 UroGen Pharma (NASDAQ:URGN) 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is UroGen Pharma’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In March 2020, UroGen Pharma had US$119m in cash, and was debt-free. Looking at the last year, the company burnt through US$89m. That means it had a cash runway of around 16 months as of March 2020. Notably, analysts forecast that UroGen Pharma will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Is UroGen Pharma’s Cash Burn Changing Over Time?
In our view, UroGen Pharma doesn’t yet produce significant amounts of operating revenue, since it reported just US$18k in the last twelve months. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. During the last twelve months, its cash burn actually ramped up 93%. While this spending increase is no doubt intended to drive growth, if the trend continues the company’s cash runway will shrink very quickly. While the past is always worth studying, it is the future that matters most of all. 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 UroGen Pharma To Raise More Cash For Growth?
While UroGen Pharma 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. 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 and fund 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.
Since it has a market capitalisation of US$520m, UroGen Pharma’s US$89m in cash burn equates to about 17% 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.
Is UroGen Pharma’s Cash Burn A Worry?
On this analysis of UroGen Pharma’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for UroGen Pharma (1 is a bit unpleasant!) that you should be aware of before investing here.
Of course UroGen Pharma 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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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.
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