Molecular Partners (VTX:MOLN) Is In A Good Position To Deliver On Growth Plans

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Molecular Partners (VTX:MOLN) shareholders is whether they should be concerned by its rate of 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'.

See our latest analysis for Molecular Partners

How Long Is Molecular Partners' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, Molecular Partners had CHF133m in cash, and was debt-free. In the last year, its cash burn was CHF92m. That means it had a cash runway of around 17 months as of December 2021. Notably, however, analysts think that Molecular Partners will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

How Well Is Molecular Partners Growing?

One thing for shareholders to keep front in mind is that Molecular Partners increased its cash burn by 201% in the last twelve months. That's not ideal, but we're made even more nervous given that operating revenue was flat over the same period. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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.

Can Molecular Partners Raise More Cash Easily?

Molecular Partners revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Molecular Partners' cash burn of CHF92m is about 41% of its CHF227m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About Molecular Partners' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Molecular Partners' cash runway was relatively promising. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Molecular Partners (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course Molecular Partners may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.