Stock Analysis

Lyell Immunopharma (NASDAQ:LYEL) Is In A Good Position To Deliver On Growth Plans

NasdaqGS:LYEL
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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, the natural question for Lyell Immunopharma (NASDAQ:LYEL) shareholders is whether they should be concerned by its rate of cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Lyell Immunopharma

When Might Lyell Immunopharma Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Lyell Immunopharma last reported its balance sheet in September 2022, it had zero debt and cash worth US$648m. In the last year, its cash burn was US$192m. Therefore, from September 2022 it had 3.4 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqGS:LYEL Debt to Equity History December 15th 2022

How Well Is Lyell Immunopharma Growing?

On balance, we think it's mildly positive that Lyell Immunopharma trimmed its cash burn by 3.7% over the last twelve months. But the operating revenue growth of 286% was even better. We think it is growing rather well, upon reflection. 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.

Can Lyell Immunopharma Raise More Cash Easily?

We are certainly impressed with the progress Lyell Immunopharma has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Lyell Immunopharma has a market capitalisation of US$888m and burnt through US$192m last year, which is 22% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Lyell Immunopharma's Cash Burn?

On this analysis of Lyell Immunopharma's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Lyell Immunopharma has 5 warning signs (and 1 which is concerning) we think you should know about.

Of course Lyell Immunopharma may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.