We're Not Very Worried About Denali Therapeutics' (NASDAQ:DNLI) Cash Burn Rate

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View 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 September 2023, Denali Therapeutics had cash of US$1.1b and no debt. Importantly, its cash burn was US$348m over the trailing twelve months. Therefore, from September 2023 it had 3.2 years of cash runway. Notably, analysts forecast that Denali Therapeutics will break even (at a free cash flow level) in about 4 years. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. The image below shows how its cash balance has been changing over the last few years.

How Well Is Denali Therapeutics Growing?

Some investors might find it troubling that Denali Therapeutics is actually increasing its cash burn, which is up 37% in the last year. Given that its operating revenue increased 208% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. It seems to be growing nicely. 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 Denali Therapeutics To Raise More Cash For Growth?

We are certainly impressed with the progress Denali 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Denali Therapeutics' cash burn of US$348m is about 13% of its US$2.6b market capitalisation. 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.

So, Should We Worry About Denali Therapeutics' Cash Burn?

As you can probably tell by now, we're not too worried about Denali Therapeutics' cash burn. For example, we think its revenue growth 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 2 warning signs for Denali Therapeutics you should be aware of, and 1 of them is a bit concerning.

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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.