We're Keeping An Eye On Pieris Pharmaceuticals' (NASDAQ:PIRS) Cash Burn Rate

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. 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 Pieris Pharmaceuticals (NASDAQ:PIRS) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. 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 Pieris Pharmaceuticals

When Might Pieris Pharmaceuticals Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2020, Pieris Pharmaceuticals had cash of US$83m and no debt. Importantly, its cash burn was US$50m over the trailing twelve months. Therefore, from September 2020 it had roughly 20 months of cash runway. Notably, analysts forecast that Pieris Pharmaceuticals will break even (at a free cash flow level) in about 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Well Is Pieris Pharmaceuticals Growing?

In the last twelve months, Pieris Pharmaceuticals kept its cash burn steady. That's not too bad, but its revenue growth of 32% was definitely a positive. On balance, we'd say the company is improving over time. 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 Hard Would It Be For Pieris Pharmaceuticals To Raise More Cash For Growth?

While Pieris Pharmaceuticals seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).

Since it has a market capitalisation of US$142m, Pieris Pharmaceuticals' US$50m in cash burn equates to about 35% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Pieris Pharmaceuticals' Cash Burn Situation?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Pieris Pharmaceuticals' revenue growth was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Pieris Pharmaceuticals (of which 1 shouldn't be ignored!) 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. 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.
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