Just because a business does not make any money, does not mean that the stock will go down. 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 Proteostasis Therapeutics (NASDAQ:PTI) shareholders should 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’.
View our latest analysis for Proteostasis Therapeutics
When Might Proteostasis Therapeutics Run Out Of Money?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In September 2019, Proteostasis Therapeutics had US$78m in cash, and was debt-free. Importantly, its cash burn was US$61m over the trailing twelve months. So it had a cash runway of approximately 15 months from September 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.
How Well Is Proteostasis Therapeutics Growing?
Some investors might find it troubling that Proteostasis Therapeutics is actually increasing its cash burn, which is up 18% in the last year. At least the revenue was up 12% during the period, even if it wasn’t up by much. In light of the data above, we’re fairly sanguine about the business growth trajectory. 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 Proteostasis Therapeutics To Raise More Cash For Growth?
While Proteostasis Therapeutics seems to be in a fairly good position, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Proteostasis Therapeutics’s cash burn of US$61m is about 71% of its US$85m market capitalisation. That’s very high expenditure relative to the company’s size, suggesting it is an extremely high risk stock.
Is Proteostasis Therapeutics’s Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Proteostasis Therapeutics’s revenue growth was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we’d be watching like a hawk for any deterioration. 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 Proteostasis Therapeutics CEO receives in total remuneration.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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