Here's Why We're Not Too Worried About Pliant Therapeutics' (NASDAQ:PLRX) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Pliant Therapeutics (NASDAQ:PLRX) 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.

See our latest analysis for Pliant Therapeutics

Does Pliant Therapeutics Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Pliant Therapeutics last reported its balance sheet in September 2021, it had zero debt and cash worth US$221m. Importantly, its cash burn was US$74m over the trailing twelve months. That means it had a cash runway of about 3.0 years as of September 2021. 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.

Is Pliant Therapeutics' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Pliant Therapeutics actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 89%, which is rather concerning. 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.

Can Pliant Therapeutics Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Pliant Therapeutics shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Pliant Therapeutics has a market capitalisation of US$497m and burnt through US$74m last year, which is 15% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Pliant Therapeutics' Cash Burn Situation?

On this analysis of Pliant Therapeutics' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Pliant Therapeutics has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.