Will Medicenna Therapeutics (TSE:MDNA) Spend Its Cash Wisely?

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Medicenna Therapeutics (TSE:MDNA) shareholders 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'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Medicenna Therapeutics

How Long Is Medicenna Therapeutics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Medicenna Therapeutics had cash of CA$33m and no debt. Looking at the last year, the company burnt through CA$19m. So it had a cash runway of approximately 21 months from December 2020. 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. You can see how its cash balance has changed over time in the image below.

How Is Medicenna Therapeutics' Cash Burn Changing Over Time?

Because Medicenna Therapeutics isn't currently generating revenue, we consider it an early-stage 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. Remarkably, it actually increased its cash burn by 302% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. 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 Easily Can Medicenna Therapeutics Raise Cash?

Given its cash burn trajectory, Medicenna Therapeutics 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. 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.

Medicenna Therapeutics' cash burn of CA$19m is about 7.3% of its CA$265m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Medicenna Therapeutics' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Medicenna Therapeutics' cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Medicenna Therapeutics' situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Medicenna Therapeutics that investors should know when investing in the stock.

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.

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