Will Infinity Pharmaceuticals (NASDAQ:INFI) Spend Its Cash Wisely?

By
Simply Wall St
Published
December 11, 2020

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, 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 should Infinity Pharmaceuticals (NASDAQ:INFI) shareholders 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.

View our latest analysis for Infinity Pharmaceuticals

How Long Is Infinity Pharmaceuticals' 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. In September 2020, Infinity Pharmaceuticals had US$41m in cash, and was debt-free. In the last year, its cash burn was US$37m. Therefore, from September 2020 it had roughly 13 months of cash runway. Notably, analysts forecast that Infinity Pharmaceuticals will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

NasdaqGS:INFI Debt to Equity History December 11th 2020

How Well Is Infinity Pharmaceuticals Growing?

Notably, Infinity Pharmaceuticals actually ramped up its cash burn very hard and fast in the last year, by 104%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 45%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Infinity Pharmaceuticals Raise More Cash Easily?

Infinity Pharmaceuticals revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$147m, Infinity Pharmaceuticals' US$37m in cash burn equates to about 25% of its 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.

Is Infinity Pharmaceuticals' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Infinity Pharmaceuticals' cash runway was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Taking a deeper dive, we've spotted 5 warning signs for Infinity Pharmaceuticals you should be aware of, and 1 of them is a bit concerning.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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. 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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