Here's Why We're A Bit Worried About Jounce Therapeutics' (NASDAQ:JNCE) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Jounce Therapeutics (NASDAQ:JNCE) shareholders should be worried about its 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Jounce Therapeutics

Does Jounce Therapeutics 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 March 2022, Jounce Therapeutics had cash of US$155m and no debt. In the last year, its cash burn was US$83m. So it had a cash runway of approximately 22 months from March 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Well Is Jounce Therapeutics Growing?

Notably, Jounce Therapeutics actually ramped up its cash burn very hard and fast in the last year, by 120%, signifying heavy investment in the business. And that is all the more of a concern in light of the fact that operating revenue was actually down by 60% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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 Jounce Therapeutics Raise Cash?

Since Jounce Therapeutics can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. 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).

Jounce Therapeutics has a market capitalisation of US$151m and burnt through US$83m last year, which is 55% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About Jounce Therapeutics' Cash Burn?

On this analysis of Jounce Therapeutics' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Taking an in-depth view of risks, we've identified 2 warning signs for Jounce Therapeutics that you should be aware of before investing.

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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.