Stock Analysis

Here's Why We're Not At All Concerned With CytomX Therapeutics' (NASDAQ:CTMX) Cash Burn Situation

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NasdaqGS:CTMX
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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. 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 should CytomX Therapeutics (NASDAQ:CTMX) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

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When Might CytomX Therapeutics Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In September 2020, CytomX Therapeutics had US$321m in cash, and was debt-free. In the last year, its cash burn was US$9.4m. That means it had a cash runway of very many years as of September 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
NasdaqGS:CTMX Debt to Equity History December 3rd 2020

How Well Is CytomX Therapeutics Growing?

Given our focus on CytomX Therapeutics' cash burn, we're delighted to see that it reduced its cash burn by a nifty 93%. And there's no doubt that the inspiriting revenue growth of 52% assisted in that improvement. Overall, we'd say its growth is rather impressive. 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 CytomX Therapeutics Raise Cash?

We are certainly impressed with the progress CytomX Therapeutics has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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. 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.

CytomX Therapeutics' cash burn of US$9.4m is about 2.7% of its US$343m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is CytomX Therapeutics' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way CytomX Therapeutics is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for CytomX Therapeutics (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course CytomX Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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What are the risks and opportunities for CytomX Therapeutics?

CytomX Therapeutics, Inc. operates as an oncology-focused biopharmaceutical company in the United States.

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Rewards

  • Trading at 36.9% below our estimate of its fair value

Risks

  • Highly volatile share price over the past 3 months

  • Currently unprofitable and not forecast to become profitable over the next 3 years

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