Stock Analysis

We're Hopeful That NGM Biopharmaceuticals (NASDAQ:NGM) Will Use Its Cash Wisely

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NasdaqGS:NGM
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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. 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 NGM Biopharmaceuticals (NASDAQ:NGM) shareholders should 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for NGM Biopharmaceuticals

Does NGM Biopharmaceuticals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2021, NGM Biopharmaceuticals had US$383m in cash, and was debt-free. Importantly, its cash burn was US$77m over the trailing twelve months. So it had a cash runway of about 5.0 years from September 2021. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqGS:NGM Debt to Equity History November 8th 2021

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. 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 NGM Biopharmaceuticals To Raise More Cash For Growth?

NGM Biopharmaceuticals seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 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.

NGM Biopharmaceuticals has a market capitalisation of US$1.7b and burnt through US$77m last year, which is 4.6% of the company's 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?

As you can probably tell by now, we're not too worried about NGM Biopharmaceuticals' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for NGM Biopharmaceuticals that investors should know when investing in the stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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