Stock Analysis

Is Larimar Therapeutics (NASDAQ:LRMR) In A Good Position To Deliver On Growth Plans?

NasdaqGM:LRMR
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Just because a business does not make any money, does not mean that the stock will go down. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Larimar Therapeutics (NASDAQ:LRMR) shareholders 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.

See our latest analysis for Larimar Therapeutics

Does Larimar Therapeutics Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2022, Larimar Therapeutics had US$55m in cash, and was debt-free. Looking at the last year, the company burnt through US$36m. Therefore, from June 2022 it had roughly 19 months of cash runway. 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.

debt-equity-history-analysis
NasdaqGM:LRMR Debt to Equity History September 2nd 2022

How Is Larimar Therapeutics' Cash Burn Changing Over Time?

Larimar Therapeutics didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn dropping by 18% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. 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 Larimar Therapeutics Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Larimar Therapeutics to raise more cash in the future. 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.

Larimar Therapeutics' cash burn of US$36m is about 78% of its US$46m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

Is Larimar Therapeutics' Cash Burn A Worry?

On this analysis of Larimar Therapeutics' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Larimar Therapeutics (of which 1 doesn't sit too well with us!) you should know about.

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.