Companies Like N4 Pharma (LON:N4P) Can Afford To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. Indeed, N4 Pharma (LON:N4P) stock is up 303% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for N4 Pharma shareholders to consider whether its cash burn is concerning. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for N4 Pharma

Does N4 Pharma Have A Long Cash Runway?

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 2020, it had zero debt and cash worth UK£2.4m. In the last year, its cash burn was UK£612k. That means it had a cash runway of about 4.0 years as of June 2020. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

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

Although N4 Pharma reported revenue of UK£12k last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. The 57% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. 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 Hard Would It Be For N4 Pharma To Raise More Cash For Growth?

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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

N4 Pharma's cash burn of UK£612k is about 3.1% of its UK£20m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About N4 Pharma's Cash Burn?

As you can probably tell by now, we're not too worried about N4 Pharma's cash burn. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for N4 Pharma (3 are significant!) that you should be aware of before investing here.

Of course N4 Pharma 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. 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.
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