Here’s Why Neon Therapeutics (NASDAQ:NTGN) Must Use Its Cash Wisely

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we’d take a look at whether Neon Therapeutics (NASDAQ:NTGN) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. 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 Neon Therapeutics

Does Neon Therapeutics 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 June 2019, Neon Therapeutics had US$61m in cash, and was debt-free. Importantly, its cash burn was US$77m over the trailing twelve months. That means it had a cash runway of around 9 months as of June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

NasdaqGS:NTGN Historical Debt, November 12th 2019
NasdaqGS:NTGN Historical Debt, November 12th 2019

How Is Neon Therapeutics’s Cash Burn Changing Over Time?

Because Neon Therapeutics isn’t currently generating revenue, we consider it an early-stage 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. Over the last year its cash burn actually increased by 36%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Neon Therapeutics Raise Cash?

Since its cash burn is moving in the wrong direction, Neon Therapeutics shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Neon Therapeutics’s cash burn of US$77m is about 132% of its US$58m market capitalisation. Given just how high that expenditure is, relative to the company’s market value, we think there’s an elevated risk of funding distress, and we would be very nervous about holding the stock.

How Risky Is Neon Therapeutics’s Cash Burn Situation?

Neon Therapeutics is not in a great position when it comes to its cash burn situation. While its increasing cash burn wasn’t too bad, its cash burn relative to its market cap does leave us rather nervous. Once we consider the metrics mentioned in this article together, we’re left with very little confidence in the company’s ability to manage its cash burn, and we think it will probably need more money. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Neon Therapeutics CEO is paid..

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.