Companies Like N4 Pharma (LON:N4P) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should N4 Pharma (LON:N4P) 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.

Check out our latest analysis for N4 Pharma

When Might N4 Pharma Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When N4 Pharma last reported its balance sheet in June 2022, it had zero debt and cash worth UK£1.6m. Importantly, its cash burn was UK£965k over the trailing twelve months. So it had a cash runway of approximately 20 months from June 2022. 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. The image below shows how its cash balance has been changing over the last few years.

How Is N4 Pharma's Cash Burn Changing Over Time?

Because N4 Pharma 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. Even though it doesn't get us excited, the 51% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of N4 Pharma due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can N4 Pharma Raise Cash?

While we're comforted by the recent reduction evident from our analysis of N4 Pharma's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of UK£652m, N4 Pharma's UK£965k in cash burn equates to about 0.1% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is N4 Pharma's Cash Burn Situation?

As you can probably tell by now, we're not too worried about N4 Pharma's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash runway wasn't quite as good, but was still rather encouraging! Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking an in-depth view of risks, we've identified 3 warning signs for N4 Pharma that you should be aware of before investing.

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.