Here's Why We're Watching Caribou Biosciences' (NASDAQ:CRBU) Cash Burn Situation

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Caribou Biosciences (NASDAQ:CRBU) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Caribou Biosciences

How Long Is Caribou Biosciences' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2024, Caribou Biosciences had cash of US$262m and no debt. Importantly, its cash burn was US$133m over the trailing twelve months. So it had a cash runway of about 2.0 years from June 2024. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

How Well Is Caribou Biosciences Growing?

At first glance it's a bit worrying to see that Caribou Biosciences actually boosted its cash burn by 34%, year on year. Given that its operating revenue increased 132% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. We think it is growing rather well, upon reflection. 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.

Can Caribou Biosciences Raise More Cash Easily?

Even though it seems like Caribou Biosciences is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Caribou Biosciences' cash burn of US$133m is about 77% of its US$172m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

How Risky Is Caribou Biosciences' Cash Burn Situation?

On this analysis of Caribou Biosciences' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Caribou Biosciences' cash burn is a risk, based on the factors we mentioned in this article. On another note, Caribou Biosciences has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.