We're Not Very Worried About Karuna Therapeutics' (NASDAQ:KRTX) Cash Burn Rate

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, Karuna Therapeutics (NASDAQ:KRTX) shareholders have done very well over the last year, with the share price soaring by 127%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether Karuna Therapeutics' cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Karuna Therapeutics

SWOT Analysis for Karuna Therapeutics

Does Karuna 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 2023, Karuna Therapeutics had cash of US$1.5b and no debt. Importantly, its cash burn was US$280m over the trailing twelve months. So it had a cash runway of about 5.3 years from March 2023. Importantly, though, analysts think that Karuna Therapeutics will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.

How Well Is Karuna Therapeutics Growing?

Notably, Karuna Therapeutics actually ramped up its cash burn very hard and fast in the last year, by 112%, signifying heavy investment in the business. That's pretty alarming given that operating revenue dropped 69% over the last year, though the business is likely attempting a strategic pivot. 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 Karuna Therapeutics Raise More Cash Easily?

Even though it seems like Karuna Therapeutics is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Karuna Therapeutics has a market capitalisation of US$8.7b and burnt through US$280m last year, which is 3.2% 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.

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

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Karuna Therapeutics' cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. 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 Karuna Therapeutics that investors should know when investing in the stock.

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.