We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Inhibikase Therapeutics (NASDAQ:IKT) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Inhibikase Therapeutics Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2022, Inhibikase Therapeutics had US$37m in cash, and was debt-free. Looking at the last year, the company burnt through US$14m. That means it had a cash runway of about 2.6 years as of March 2022. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Well Is Inhibikase Therapeutics Growing?
Notably, Inhibikase Therapeutics actually ramped up its cash burn very hard and fast in the last year, by 197%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 5.2%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Inhibikase Therapeutics is building its business over time.
How Easily Can Inhibikase Therapeutics Raise Cash?
While Inhibikase Therapeutics seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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$23m, Inhibikase Therapeutics' US$14m in cash burn equates to about 62% of its market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Inhibikase Therapeutics' Cash Burn A Worry?
On this analysis of Inhibikase Therapeutics' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Inhibikase Therapeutics (1 is a bit concerning!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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.
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