Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for NGM Biopharmaceuticals (NASDAQ:NGM) shareholders is whether they should be concerned by its rate of 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 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. In September 2020, NGM Biopharmaceuticals had US$288m in cash, and was debt-free. Looking at the last year, the company burnt through US$81m. That means it had a cash runway of about 3.6 years as of September 2020. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
How Well Is NGM Biopharmaceuticals Growing?
It was quite stunning to see that NGM Biopharmaceuticals increased its cash burn by 261% over the last year. 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. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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. 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. 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$2.0b and burnt through US$81m last year, which is 4.1% 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?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought NGM Biopharmaceuticals' cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Separately, we looked at different risks affecting the company and spotted 3 warning signs for NGM Biopharmaceuticals (of which 1 makes us a bit uncomfortable!) you should know about.
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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.