Stock Analysis

Companies Like NGM Biopharmaceuticals (NASDAQ:NGM) Are In A Position To Invest In Growth

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NasdaqGS:NGM
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We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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? 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 NGM Biopharmaceuticals

Does NGM Biopharmaceuticals Have A Long Cash Runway?

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. When NGM Biopharmaceuticals last reported its balance sheet in September 2021, it had zero debt and cash worth US$383m. Importantly, its cash burn was US$77m over the trailing twelve months. Therefore, from September 2021 it had 5.0 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqGS:NGM Debt to Equity History February 21st 2022

How Well Is NGM Biopharmaceuticals Growing?

NGM Biopharmaceuticals reduced its cash burn by 4.9% during the last year, which points to some degree of discipline. But the revenue dip of 22% in the same period was a bit concerning. Considering both these factors, we're not particularly excited by its growth profile. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For NGM Biopharmaceuticals To Raise More Cash For Growth?

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. 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$1.2b, NGM Biopharmaceuticals' US$77m in cash burn equates to about 6.5% 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.

How Risky Is NGM Biopharmaceuticals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way NGM Biopharmaceuticals is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for NGM Biopharmaceuticals that potential shareholders should take into account before putting money into a stock.

Of course NGM Biopharmaceuticals 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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