We're Not Very Worried About ALX Oncology Holdings' (NASDAQ:ALXO) Cash Burn Rate

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 ALX Oncology Holdings (NASDAQ:ALXO) shareholders be worried about its cash burn? 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.

Check out our latest analysis for ALX Oncology Holdings

How Long Is ALX Oncology Holdings' 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. As at December 2020, ALX Oncology Holdings had cash of US$434m and no debt. In the last year, its cash burn was US$38m. So it had a very long cash runway of many years from December 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Well Is ALX Oncology Holdings Growing?

Notably, ALX Oncology Holdings actually ramped up its cash burn very hard and fast in the last year, by 161%, signifying heavy investment in the business. And that is all the more of a concern in light of the fact that operating revenue was actually down by 75% in the last year, as the company no doubt scrambles to change its fortunes. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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 ALX Oncology Holdings Raise Cash?

ALX Oncology Holdings seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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.

ALX Oncology Holdings has a market capitalisation of US$2.5b and burnt through US$38m last year, which is 1.5% of the company's 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 ALX Oncology Holdings' Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought ALX Oncology Holdings' cash runway 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 ALX Oncology Holdings' situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for ALX Oncology Holdings that potential shareholders should take into account before putting money into a 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. 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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