Crinetics Pharmaceuticals (NASDAQ:CRNX) Is In A Good Position To Deliver On Growth Plans

By
Simply Wall St
Published
January 19, 2022
NasdaqGS:CRNX
Source: Shutterstock

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Crinetics Pharmaceuticals (NASDAQ:CRNX) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Crinetics Pharmaceuticals

Does Crinetics Pharmaceuticals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2021, Crinetics Pharmaceuticals had cash of US$193m and no debt. Looking at the last year, the company burnt through US$82m. So it had a cash runway of about 2.4 years from September 2021. Importantly, analysts think that Crinetics Pharmaceuticals 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:CRNX Debt to Equity History January 19th 2022

How Is Crinetics Pharmaceuticals' Cash Burn Changing Over Time?

Because Crinetics Pharmaceuticals isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 37%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Crinetics Pharmaceuticals Raise Cash?

Given its cash burn trajectory, Crinetics Pharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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 US$1.0b, Crinetics Pharmaceuticals' US$82m in cash burn equates to about 8.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Crinetics Pharmaceuticals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Crinetics Pharmaceuticals is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. 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. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 4 warning signs for Crinetics Pharmaceuticals you should be aware of, and 1 of them is a bit concerning.

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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