Deciphera Pharmaceuticals (NASDAQ:DCPH) Is 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Deciphera Pharmaceuticals (NASDAQ:DCPH) shareholders should be worried about its 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Deciphera Pharmaceuticals

Does Deciphera Pharmaceuticals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, Deciphera Pharmaceuticals had US$395m in cash, and was debt-free. Importantly, its cash burn was US$221m over the trailing twelve months. So it had a cash runway of approximately 21 months from June 2021. Notably, analysts forecast that Deciphera Pharmaceuticals will break even (at a free cash flow level) in about 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Deciphera Pharmaceuticals Growing?

On balance, we think it's mildly positive that Deciphera Pharmaceuticals trimmed its cash burn by 3.4% over the last twelve months. But that's nothing compared to its mouth-watering operating revenue growth of 1,070%. We think it is growing rather well, upon reflection. 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 Easily Can Deciphera Pharmaceuticals Raise Cash?

Even though it seems like Deciphera Pharmaceuticals is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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).

Deciphera Pharmaceuticals has a market capitalisation of US$1.7b and burnt through US$221m last year, which is 13% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Deciphera Pharmaceuticals' Cash Burn Situation?

Deciphera Pharmaceuticals appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash runway quite good, but its revenue growth was a real positive. One real positive is that analysts are forecasting that the company will reach breakeven. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Deciphera Pharmaceuticals that potential shareholders should take into account before putting money into a stock.

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)

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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.
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