Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Checkpoint Therapeutics (NASDAQ:CKPT) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Checkpoint Therapeutics Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2020, Checkpoint Therapeutics had US$42m in cash, and was debt-free. In the last year, its cash burn was US$16m. That means it had a cash runway of about 2.6 years as of September 2020. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Well Is Checkpoint Therapeutics Growing?
We reckon the fact that Checkpoint Therapeutics managed to shrink its cash burn by 33% over the last year is rather encouraging. In contrast, however, operating revenue tanked 77% during the period. Considering both these metrics, we're a little concerned about how the company is developing. 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 Hard Would It Be For Checkpoint Therapeutics To Raise More Cash For Growth?
Checkpoint Therapeutics 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. 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.
Since it has a market capitalisation of US$182m, Checkpoint Therapeutics' US$16m in cash burn equates to about 9.0% 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.
How Risky Is Checkpoint Therapeutics' Cash Burn Situation?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Checkpoint Therapeutics' 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 Checkpoint Therapeutics' situation. Taking a deeper dive, we've spotted 5 warning signs for Checkpoint Therapeutics you should be aware of, and 1 of them can't be ignored.
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