Is Ascendis Pharma (NASDAQ:ASND) In A Good Position To Invest In Growth?

By
Simply Wall St
Published
January 07, 2022
NasdaqGS:ASND
Source: Shutterstock

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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Ascendis Pharma (NASDAQ:ASND) 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.

See our latest analysis for Ascendis Pharma

When Might Ascendis Pharma Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In September 2021, Ascendis Pharma had €858m in cash, and was debt-free. Importantly, its cash burn was €409m over the trailing twelve months. That means it had a cash runway of about 2.1 years as of September 2021. Importantly, analysts think that Ascendis Pharma will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
NasdaqGS:ASND Debt to Equity History January 7th 2022

How Well Is Ascendis Pharma Growing?

Ascendis Pharma boosted investment sharply in the last year, with cash burn ramping by 65%. And that is all the more of a concern in light of the fact that operating revenue was actually down by 62% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 Hard Would It Be For Ascendis Pharma To Raise More Cash For Growth?

Even though it seems like Ascendis Pharma is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of €6.1b, Ascendis Pharma's €409m in cash burn equates to about 6.7% of its market value. 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 Ascendis Pharma's Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Ascendis Pharma's cash burn relative to its market cap was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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 Ascendis Pharma's situation. Taking an in-depth view of risks, we've identified 4 warning signs for Ascendis 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 interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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