Here's Why We're Not Too Worried About Cardiff Oncology's (NASDAQ:CRDF) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Cardiff Oncology (NASDAQ:CRDF) stock is up 670% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So notwithstanding the buoyant share price, we think it's well worth asking whether Cardiff Oncology's cash burn is too risky. 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Cardiff Oncology

How Long Is Cardiff Oncology's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Cardiff Oncology last reported its balance sheet in December 2020, it had zero debt and cash worth US$131m. Looking at the last year, the company burnt through US$17m. So it had a cash runway of about 7.9 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. Depicted below, you can see how its cash holdings have changed over time.

How Is Cardiff Oncology's Cash Burn Changing Over Time?

In our view, Cardiff Oncology doesn't yet produce significant amounts of operating revenue, since it reported just US$366k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With the cash burn rate up 24% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Cardiff Oncology Raise More Cash Easily?

Given its cash burn trajectory, Cardiff Oncology shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 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).

Cardiff Oncology has a market capitalisation of US$356m and burnt through US$17m last year, which is 4.6% of the company's 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.

So, Should We Worry About Cardiff Oncology's Cash Burn?

As you can probably tell by now, we're not too worried about Cardiff Oncology's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Cardiff Oncology (2 shouldn't be ignored!) that you should be aware of before investing here.

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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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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