We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Intra-Cellular Therapies (NASDAQ:ITCI) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.
Does Intra-Cellular Therapies Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Intra-Cellular Therapies last reported its balance sheet in March 2021, it had zero debt and cash worth US$612m. In the last year, its cash burn was US$227m. So it had a cash runway of about 2.7 years from March 2021. Notably, however, analysts think that Intra-Cellular Therapies will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Intra-Cellular Therapies Growing?
Intra-Cellular Therapies boosted investment sharply in the last year, with cash burn ramping by 57%. But shareholders are no doubt taking some confidence from the rockstar revenue growth of 3,187% during that same year. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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 Intra-Cellular Therapies Raise Cash?
We are certainly impressed with the progress Intra-Cellular Therapies has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).
Intra-Cellular Therapies has a market capitalisation of US$2.8b and burnt through US$227m last year, which is 8.1% of the company's 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.
How Risky Is Intra-Cellular Therapies' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Intra-Cellular Therapies' cash burn. For example, we think its revenue growth suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Intra-Cellular Therapies that investors should know when investing in the stock.
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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