There’s no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Zynerba Pharmaceuticals (NASDAQ:ZYNE) shareholders 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is Zynerba Pharmaceuticals’ Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Zynerba Pharmaceuticals last reported its balance sheet in March 2020, it had zero debt and cash worth US$61m. Looking at the last year, the company burnt through US$37m. That means it had a cash runway of around 20 months as of March 2020. Importantly, analysts think that Zynerba Pharmaceuticals will reach cashflow breakeven in 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Zynerba Pharmaceuticals’ Cash Burn Changing Over Time?
Whilst it’s great to see that Zynerba Pharmaceuticals has already begun generating revenue from operations, last year it only produced US$86k, so we don’t think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 15%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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 Hard Would It Be For Zynerba Pharmaceuticals To Raise More Cash For Growth?
Given its cash burn trajectory, Zynerba Pharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and 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.
Zynerba Pharmaceuticals’ cash burn of US$37m is about 34% of its US$107m market capitalisation. That’s fairly notable cash burn, so if the company had to sell shares to cover the cost of another year’s operations, shareholders would suffer some costly dilution.
So, Should We Worry About Zynerba Pharmaceuticals’ Cash Burn?
On this analysis of Zynerba Pharmaceuticals’ cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Zynerba Pharmaceuticals (of which 1 is significant!) you should know about.
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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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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