Is Pulmatrix (NASDAQ:PULM) In A Good Position To Invest In Growth?

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Pulmatrix (NASDAQ:PULM) shareholders 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Pulmatrix

Does Pulmatrix Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2021, Pulmatrix had US$53m in cash, and was debt-free. In the last year, its cash burn was US$18m. Therefore, from September 2021 it had 2.9 years of cash runway. Notably, however, the one analyst we see covering the stock thinks that Pulmatrix will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Well Is Pulmatrix Growing?

At first glance it's a bit worrying to see that Pulmatrix actually boosted its cash burn by 27%, year on year. Also concerning, operating revenue was actually down by 46% in that time. Considering both these metrics, we're a little concerned about how the company is developing. 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 Hard Would It Be For Pulmatrix To Raise More Cash For Growth?

While Pulmatrix 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of US$22m, Pulmatrix's US$18m in cash burn equates to about 84% of its market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

How Risky Is Pulmatrix's 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 Pulmatrix's cash runway was relatively promising. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Summing up, we think the Pulmatrix's cash burn is a risk, based on the factors we mentioned in this article. Taking an in-depth view of risks, we've identified 2 warning signs for Pulmatrix that you should be aware of before investing.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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.