Can Praxis Precision Medicines (NASDAQ:PRAX) Afford To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Praxis Precision Medicines (NASDAQ:PRAX) shareholders is whether they should be concerned by its rate of 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 Praxis Precision Medicines

When Might Praxis Precision Medicines Run Out Of Money?

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 2023, Praxis Precision Medicines had US$124m in cash, and was debt-free. Importantly, its cash burn was US$138m over the trailing twelve months. That means it had a cash runway of around 11 months as of June 2023. 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. You can see how its cash balance has changed over time in the image below.

How Is Praxis Precision Medicines' Cash Burn Changing Over Time?

In our view, Praxis Precision Medicines doesn't yet produce significant amounts of operating revenue, since it reported just US$1.5m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. As it happens, the company's cash burn reduced by 24% over the last year, which suggests that management are mindful of the possibility of running out of cash. While the past is always worth studying, it is the future that matters most of all. 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 Praxis Precision Medicines Raise Cash?

While Praxis Precision Medicines is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Praxis Precision Medicines' cash burn of US$138m is about the same as its market capitalisation of US$141m. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is Praxis Precision Medicines' Cash Burn Situation?

On this analysis of Praxis Precision Medicines' cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Praxis Precision Medicines (2 make us uncomfortable!) that you should be aware of before investing here.

Of course Praxis Precision Medicines 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.