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 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 Intra-Cellular Therapies (NASDAQ:ITCI) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Intra-Cellular Therapies Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2021, Intra-Cellular Therapies had cash of US$477m and no debt. Importantly, its cash burn was US$255m over the trailing twelve months. Therefore, from September 2021 it had roughly 22 months of cash runway. Notably, analysts forecast that Intra-Cellular Therapies will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Intra-Cellular Therapies Growing?
At first glance it's a bit worrying to see that Intra-Cellular Therapies actually boosted its cash burn by 30%, year on year. On the other hand, the impressive revenue growth of 577% signals that the increased expenditure may well be yielding results. Sometimes you need to spend money to make money! It seems to be growing nicely. 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?
Intra-Cellular Therapies seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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.
Intra-Cellular Therapies' cash burn of US$255m is about 6.1% of its US$4.2b market capitalisation. 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 Intra-Cellular Therapies' Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Intra-Cellular Therapies is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. One real positive is that analysts are forecasting that the company will reach breakeven. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. An in-depth examination of risks revealed 1 warning sign for Intra-Cellular Therapies that readers should think about before committing capital to this 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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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.