Companies Like Denali Therapeutics (NASDAQ:DNLI) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. 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 Denali Therapeutics (NASDAQ:DNLI) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Denali Therapeutics

When Might Denali Therapeutics Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2022, Denali Therapeutics had cash of US$1.1b and no debt. Importantly, its cash burn was US$234m over the trailing twelve months. So it had a cash runway of about 4.6 years from June 2022. A runway of this length affords the company the time and space it needs to develop the business. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.

Is Denali Therapeutics' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Denali Therapeutics actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The grim reality for shareholders is that operating revenue fell by 69% over the last twelve months, which is not what we want to see in a cash burning company. 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.

Can Denali Therapeutics Raise More Cash Easily?

Given its problematic fall in revenue, Denali Therapeutics shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Denali Therapeutics has a market capitalisation of US$3.8b and burnt through US$234m last year, which is 6.1% 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.

How Risky Is Denali Therapeutics' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Denali Therapeutics is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Denali Therapeutics that potential shareholders should take into account before putting money into a stock.

Of course Denali 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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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.