Will Kiniksa Pharmaceuticals (NASDAQ:KNSA) Spend Its Cash Wisely?

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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we’d take a look at whether Kiniksa Pharmaceuticals (NASDAQ:KNSA) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Kiniksa Pharmaceuticals

Does Kiniksa Pharmaceuticals Have A Long Cash Runway?

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. As at September 2019, Kiniksa Pharmaceuticals had cash of US$259m and no debt. In the last year, its cash burn was US$167m. That means it had a cash runway of around 19 months as of September 2019. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. The image below shows how its cash balance has been changing over the last few years.

NasdaqGS:KNSA Historical Debt, January 6th 2020
NasdaqGS:KNSA Historical Debt, January 6th 2020

How Is Kiniksa Pharmaceuticals’s Cash Burn Changing Over Time?

Kiniksa Pharmaceuticals didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The skyrocketing cash burn up 114% year on year certainly tests our nerves. That sort of spending growth rate can’t continue for very long before it causes balance sheet weakness, generally speaking. 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 Kiniksa Pharmaceuticals To Raise More Cash For Growth?

Given its cash burn trajectory, Kiniksa Pharmaceuticals 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. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of US$672m, Kiniksa Pharmaceuticals’s US$167m in cash burn equates to about 25% of its market value. 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.

How Risky Is Kiniksa Pharmaceuticals’s Cash Burn Situation?

On this analysis of Kiniksa Pharmaceuticals’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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. 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 Kiniksa Pharmaceuticals 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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