We can readily understand why investors are attracted to unprofitable companies. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should NGM Biopharmaceuticals (NASDAQ:NGM) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does NGM Biopharmaceuticals Have A Long Cash Runway?
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. When NGM Biopharmaceuticals last reported its balance sheet in March 2021, it had zero debt and cash worth US$413m. Looking at the last year, the company burnt through US$88m. So it had a cash runway of about 4.7 years from March 2021. 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.
How Well Is NGM Biopharmaceuticals Growing?
NGM Biopharmaceuticals boosted investment sharply in the last year, with cash burn ramping by 75%. While that's concerning on it's own, the fact that operating revenue was actually down 17% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can NGM Biopharmaceuticals Raise Cash?
While NGM Biopharmaceuticals seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$1.7b, NGM Biopharmaceuticals' US$88m in cash burn equates to about 5.3% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
Is NGM Biopharmaceuticals' Cash Burn A Worry?
On this analysis of NGM Biopharmaceuticals' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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 4 warning signs for NGM Biopharmaceuticals (of which 1 is 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)
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What are the risks and opportunities for NGM Biopharmaceuticals?
Revenue is forecast to grow 15.29% per year
Shareholders have been diluted in the past year
Currently unprofitable and not forecast to become profitable over the next 3 years
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NGM Biopharmaceuticals, Inc., a biopharmaceutical company, engages in the discovery and development of novel therapeutics to treat liver and metabolic diseases, retinal diseases, and cancer.
Flawless balance sheet with concerning outlook.