Here's Why We're Not Too Worried About Praxis Precision Medicines' (NASDAQ:PRAX) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. Indeed, Praxis Precision Medicines (NASDAQ:PRAX) stock is up 332% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether Praxis Precision Medicines' cash burn is too risky. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Praxis Precision Medicines

When Might Praxis Precision Medicines Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at September 2024, Praxis Precision Medicines had cash of US$357m and no debt. Looking at the last year, the company burnt through US$100m. Therefore, from September 2024 it had 3.6 years of cash runway. Notably, however, analysts think that Praxis Precision Medicines will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Praxis Precision Medicines Growing?

Praxis Precision Medicines reduced its cash burn by 14% during the last year, which points to some degree of discipline. But the revenue dip of 17% in the same period was a bit concerning. In light of the data above, we're fairly sanguine about the business growth trajectory. 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 Praxis Precision Medicines Raise More Cash Easily?

Even though it seems like Praxis Precision Medicines is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$100m is about 7.1% of its US$1.4b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Praxis Precision Medicines' Cash Burn?

As you can probably tell by now, we're not too worried about Praxis Precision Medicines' cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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, we conducted an in-depth investigation of the company, and identified 3 warning signs for Praxis Precision Medicines (1 is concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.