Companies Like Neuren Pharmaceuticals (ASX:NEU) Can Afford To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, Neuren Pharmaceuticals (ASX:NEU) shareholders have done very well over the last year, with the share price soaring by 208%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Neuren Pharmaceuticals shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Neuren Pharmaceuticals

Does Neuren 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. In December 2021, Neuren Pharmaceuticals had AU$37m in cash, and was debt-free. Looking at the last year, the company burnt through AU$10.0m. That means it had a cash runway of about 3.7 years as of December 2021. Importantly, though, analysts think that Neuren Pharmaceuticals will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Is Neuren Pharmaceuticals' Cash Burn Changing Over Time?

Whilst it's great to see that Neuren Pharmaceuticals has already begun generating revenue from operations, last year it only produced AU$3.2m, so we don't think it is generating significant revenue, at this point. 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. Over the last year its cash burn actually increased by 23%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 Easily Can Neuren Pharmaceuticals Raise Cash?

Given its cash burn trajectory, Neuren Pharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Neuren Pharmaceuticals has a market capitalisation of AU$489m and burnt through AU$10.0m last year, which is 2.0% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Neuren Pharmaceuticals' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Neuren Pharmaceuticals is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. An in-depth examination of risks revealed 2 warning signs for Neuren Pharmaceuticals that readers should think about before committing capital to this stock.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.