Is Decibel Therapeutics (NASDAQ:DBTX) In A Good Position To Deliver On Growth Plans?

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Decibel Therapeutics (NASDAQ:DBTX) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Decibel Therapeutics

Does Decibel Therapeutics Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2022, Decibel Therapeutics had cash of US$112m and no debt. In the last year, its cash burn was US$59m. So it had a cash runway of approximately 23 months from September 2022. 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. The image below shows how its cash balance has been changing over the last few years.

How Is Decibel Therapeutics' Cash Burn Changing Over Time?

Because Decibel Therapeutics 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. During the last twelve months, its cash burn actually ramped up 51%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Decibel Therapeutics To Raise More Cash For Growth?

While Decibel Therapeutics does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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.

Decibel Therapeutics has a market capitalisation of US$87m and burnt through US$59m last year, which is 68% of the company's market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

Is Decibel Therapeutics' Cash Burn A Worry?

On this analysis of Decibel Therapeutics' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Decibel Therapeutics (2 are a bit unpleasant!) 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 companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

What are the risks and opportunities for Decibel Therapeutics?

NasdaqGS:DBTX

Decibel Therapeutics

Decibel Therapeutics, Inc., a clinical-stage biotechnology company, engages in discovering and developing transformative treatments for hearing and balance disorders.Show more

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Rewards

• Revenue is forecast to grow 55.03% per year

Risks

• Earnings are forecast to decline by an average of 2.8% per year for the next 3 years

• Makes less than USD$1m in revenue ($0)

• Does not have a meaningful market cap ($76M)

• 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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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.