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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
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). Let's start with an examination of the business' cash, relative to its cash burn.
When Might Larimar Therapeutics Run Out Of Money?
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 September 2021, Larimar Therapeutics had cash of US$78m and no debt. Importantly, its cash burn was US$44m over the trailing twelve months. Therefore, from September 2021 it had roughly 21 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. Depicted below, you can see how its cash holdings have changed over time.
How Is Larimar Therapeutics' Cash Burn Changing Over Time?
Because Larimar Therapeutics isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 9.9%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Larimar Therapeutics Raise More Cash Easily?
While its cash burn is only increasing slightly, Larimar Therapeutics shareholders should still consider the potential need for further cash, down the track. Companies can raise capital through either debt or equity. 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).
Larimar Therapeutics' cash burn of US$44m is about 56% of its US$79m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
So, Should We Worry About Larimar Therapeutics' Cash Burn?
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. Summing up, we think the Larimar Therapeutics' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Larimar Therapeutics (of which 2 are a bit unpleasant!) you should know about.
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)
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.