Stock Analysis

Here's Why We're Not Too Worried About Magenta Therapeutics' (NASDAQ:MGTA) Cash Burn Situation

NasdaqCM:MGTA
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We can readily understand why investors are attracted to unprofitable companies. 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.

Given this risk, we thought we'd take a look at whether Magenta Therapeutics (NASDAQ:MGTA) shareholders should 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Magenta Therapeutics

When Might Magenta Therapeutics Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2021, Magenta Therapeutics had cash of US$193m and no debt. Looking at the last year, the company burnt through US$59m. So it had a cash runway of about 3.3 years from September 2021. 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.

debt-equity-history-analysis
NasdaqGM:MGTA Debt to Equity History December 16th 2021

How Is Magenta Therapeutics' Cash Burn Changing Over Time?

Because Magenta 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. As it happens, the company's cash burn reduced by 11% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. 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.

How Hard Would It Be For Magenta Therapeutics To Raise More Cash For Growth?

While Magenta Therapeutics is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel 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. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Since it has a market capitalisation of US$290m, Magenta Therapeutics' US$59m in cash burn equates to about 20% of its 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 Magenta Therapeutics' Cash Burn?

As you can probably tell by now, we're not too worried about Magenta Therapeutics' cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Magenta Therapeutics (of which 2 are a bit unpleasant!) you should know about.

Of course Magenta Therapeutics 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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

About NasdaqCM:MGTA

Magenta Therapeutics

Magenta Therapeutics, Inc., a biotechnology company focus on improving stem cell transplantation.

Flawless balance sheet and slightly overvalued.

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