Here's Why We're Watching Neoleukin Therapeutics' (NASDAQ:NLTX) Cash Burn Situation

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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Neoleukin Therapeutics (NASDAQ:NLTX) 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.

Check out our latest analysis for Neoleukin Therapeutics

How Long Is Neoleukin Therapeutics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2022, Neoleukin Therapeutics had US$107m in cash, and was debt-free. Looking at the last year, the company burnt through US$48m. That means it had a cash runway of about 2.2 years as of September 2022. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Is Neoleukin Therapeutics' Cash Burn Changing Over Time?

Neoleukin Therapeutics didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. 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 Easily Can Neoleukin Therapeutics Raise Cash?

Since its cash burn is increasing (albeit only slightly), Neoleukin Therapeutics shareholders should still be mindful of the possibility it will require more cash in the future. 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.

Since it has a market capitalisation of US$31m, Neoleukin Therapeutics' US$48m in cash burn equates to about 157% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

So, Should We Worry About Neoleukin Therapeutics' Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Neoleukin Therapeutics' cash runway was relatively promising. Summing up, we think the Neoleukin Therapeutics' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Neoleukin Therapeutics (of which 1 is a bit concerning!) you should know about.

Of course Neoleukin Therapeutics 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.