There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Idera Pharmaceuticals (NASDAQ:IDRA) 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). Let's start with an examination of the business's cash, relative to its cash burn.
Check out our latest analysis for Idera Pharmaceuticals
Does Idera Pharmaceuticals Have A Long Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2019, Idera Pharmaceuticals had cash of US$52m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$47m. That means it had a cash runway of around 13 months as of June 2019. 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. Depicted below, you can see how its cash holdings have changed over time.
How Is Idera Pharmaceuticals's Cash Burn Changing Over Time?
Although Idera Pharmaceuticals had revenue of US$1.7m in the last twelve months, its operating revenue was only US$1.7m in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. With cash burn dropping by 11% 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.
Can Idera Pharmaceuticals Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Idera Pharmaceuticals to raise more cash in the future. 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).
Idera Pharmaceuticals's cash burn of US$47m is about 65% of its US$72m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Idera Pharmaceuticals's Cash Burn A Worry?
On this analysis of Idera Pharmaceuticals's cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Idera Pharmaceuticals's cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that Idera Pharmaceuticals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course Idera Pharmaceuticals 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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.