There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Marinus Pharmaceuticals (NASDAQ:MRNS) 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Does Marinus Pharmaceuticals Have A Long Cash Runway?
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 Marinus Pharmaceuticals last reported its balance sheet in June 2019, it had zero debt and cash worth US$52m. In the last year, its cash burn was US$37m. Therefore, from June 2019 it had roughly 17 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.
How Is Marinus Pharmaceuticals’s Cash Burn Changing Over Time?
Marinus 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. During the last twelve months, its cash burn actually ramped up 86%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. 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 Marinus Pharmaceuticals Raise Cash?
While Marinus Pharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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 to 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.
Marinus Pharmaceuticals has a market capitalisation of US$60m and burnt through US$37m last year, which is 61% of the company’s market value. That’s very high expenditure relative to the company’s size, suggesting it is an extremely high risk stock.
Is Marinus Pharmaceuticals’s Cash Burn A Worry?
On this analysis of Marinus Pharmaceuticals’s 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 Marinus Pharmaceuticals’s cash burn is a risk, based on the factors we mentioned in this article. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Marinus Pharmaceuticals insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course Marinus 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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.