There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Humanigen (NASDAQ:HGEN) shareholders have done very well over the last year, with the share price soaring by 141%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So notwithstanding the buoyant share price, we think it's well worth asking whether Humanigen'scash burn is too risky 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'.
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When Might Humanigen Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. Humanigen has such a small amount of debt that we'll set it aside, and focus on the US$42m in cash it held at June 2020. In the last year, its cash burn was US$24m. That means it had a cash runway of around 21 months as of June 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Is Humanigen's Cash Burn Changing Over Time?
Because Humanigen 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. Its cash burn positively exploded in the last year, up 412%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Humanigen makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Humanigen Raise More Cash Easily?
While Humanigen 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. Companies can raise capital through either debt or equity. 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.
Since it has a market capitalisation of US$407m, Humanigen's US$24m in cash burn equates to about 6.0% of its 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.
Is Humanigen's Cash Burn A Worry?
On this analysis of Humanigen's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Humanigen's situation. Taking a deeper dive, we've spotted 2 warning signs for Humanigen you should be aware of, and 1 of them can't be ignored.
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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