We're Hopeful That Ascendis Pharma (NASDAQ:ASND) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Ascendis Pharma (NASDAQ:ASND) 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'. 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 company's cash runway is calculated by dividing its cash hoard by its cash burn. When Ascendis Pharma last reported its balance sheet in December 2019, it had zero debt and cash worth €598m. In the last year, its cash burn was €181m. So it had a cash runway of about 3.3 years from December 2019. Importantly, analysts think that Ascendis Pharma will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Well Is Ascendis Pharma Growing?

Some investors might find it troubling that Ascendis Pharma is actually increasing its cash burn, which is up 28% in the last year. The good news is that operating revenue increased by 26% in the last year, indicating that the business is gaining some traction. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Ascendis Pharma Raise Cash?

There's no doubt Ascendis Pharma seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.

Ascendis Pharma's cash burn of €181m is about 3.4% of its €5.4b market capitalisation. 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.

How Risky Is Ascendis Pharma's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Ascendis Pharma's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Ascendis Pharma that investors should know when investing in the stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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