Can Pieris Pharmaceuticals (NASDAQ:PIRS) Afford To Invest In Growth?

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should Pieris Pharmaceuticals (NASDAQ:PIRS) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Pieris Pharmaceuticals

How Long Is Pieris Pharmaceuticals' 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. When Pieris Pharmaceuticals last reported its balance sheet in September 2022, it had zero debt and cash worth US$70m. Importantly, its cash burn was US$59m over the trailing twelve months. That means it had a cash runway of around 14 months as of September 2022. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Well Is Pieris Pharmaceuticals Growing?

It was quite stunning to see that Pieris Pharmaceuticals increased its cash burn by 424% over the last year. That does give us pause, and we can't take much solace in the operating revenue growth of 15% in the same time frame. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Pieris Pharmaceuticals Raise Cash?

Since Pieris Pharmaceuticals has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Pieris Pharmaceuticals has a market capitalisation of US$70m and burnt through US$59m last year, which is 85% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is Pieris Pharmaceuticals' Cash Burn A Worry?

On this analysis of Pieris Pharmaceuticals' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. 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. On another note, Pieris Pharmaceuticals has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course Pieris Pharmaceuticals 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.