Merrimack Pharmaceuticals (NASDAQ:MACK) Is In A Strong Position To Grow Its Business

Just because a business does not make any money, does not mean that the stock will go down. For example, Merrimack Pharmaceuticals (NASDAQ:MACK) shareholders have done very well over the last year, with the share price soaring by 116%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

In light of its strong share price run, we think now is a good time to investigate how risky Merrimack Pharmaceuticals' cash burn is. 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 Merrimack Pharmaceuticals

When Might Merrimack Pharmaceuticals 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. In September 2020, Merrimack Pharmaceuticals had US$16m in cash, and was debt-free. Looking at the last year, the company burnt through US$3.4m. So it had a cash runway of about 4.7 years from September 2020. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Is Merrimack Pharmaceuticals' Cash Burn Changing Over Time?

Merrimack Pharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. From a cash flow perspective, it's great to see the company's cash burn dropped by 92% over the last year. That might not be promising when it comes to business development, but it's good for the companies cash preservation. Admittedly, we're a bit cautious of Merrimack Pharmaceuticals due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Merrimack Pharmaceuticals To Raise More Cash For Growth?

There's no doubt Merrimack Pharmaceuticals' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of US$92m, Merrimack Pharmaceuticals' US$3.4m in cash burn equates to about 3.6% of its 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.

How Risky Is Merrimack Pharmaceuticals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Merrimack Pharmaceuticals is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn relative to its market cap was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Merrimack Pharmaceuticals that potential shareholders should take into account before putting money into a stock.

Of course Merrimack Pharmaceuticals 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. 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.
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