We're A Little Worried About NGM Biopharmaceuticals' (NASDAQ:NGM) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should NGM Biopharmaceuticals (NASDAQ:NGM) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for NGM Biopharmaceuticals

When Might NGM Biopharmaceuticals 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. When NGM Biopharmaceuticals last reported its balance sheet in June 2023, it had zero debt and cash worth US$194m. Looking at the last year, the company burnt through US$142m. Therefore, from June 2023 it had roughly 16 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. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. The image below shows how its cash balance has been changing over the last few years.

How Well Is NGM Biopharmaceuticals Growing?

At first glance it's a bit worrying to see that NGM Biopharmaceuticals actually boosted its cash burn by 24%, year on year. The fact that operating revenue was down 57% only gives us further disquiet. Considering both these metrics, we're a little concerned about how the company is developing. 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 Easily Can NGM Biopharmaceuticals Raise Cash?

Since NGM Biopharmaceuticals can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

NGM Biopharmaceuticals has a market capitalisation of US$100m and burnt through US$142m last year, which is 142% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is NGM Biopharmaceuticals' Cash Burn Situation?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought NGM Biopharmaceuticals' cash runway was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. 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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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.