Here's Why We're Not Too Worried About GlycoMimetics' (NASDAQ:GLYC) Cash Burn Situation

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, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for GlycoMimetics (NASDAQ:GLYC) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for GlycoMimetics

Does GlycoMimetics Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When GlycoMimetics last reported its balance sheet in September 2020, it had zero debt and cash worth US$143m. In the last year, its cash burn was US$42m. That means it had a cash runway of about 3.4 years as of September 2020. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Is GlycoMimetics' Cash Burn Changing Over Time?

Whilst it's great to see that GlycoMimetics has already begun generating revenue from operations, last year it only produced US$10m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With cash burn dropping by 14% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can GlycoMimetics Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for GlycoMimetics to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

GlycoMimetics has a market capitalisation of US$178m and burnt through US$42m last year, which is 24% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is GlycoMimetics' Cash Burn Situation?

As you can probably tell by now, we're not too worried about GlycoMimetics' cash burn. For example, we think its cash runway suggests that the company is on a good path. While its cash burn relative to its market cap wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for GlycoMimetics that potential shareholders should take into account before putting money into a stock.

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