We're Hopeful That RAPT Therapeutics (NASDAQ:RAPT) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should RAPT Therapeutics (NASDAQ:RAPT) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for RAPT Therapeutics

When Might RAPT Therapeutics 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. When RAPT Therapeutics last reported its balance sheet in September 2022, it had zero debt and cash worth US$195m. Importantly, its cash burn was US$70m over the trailing twelve months. That means it had a cash runway of about 2.8 years as of September 2022. Notably, analysts forecast that RAPT Therapeutics will break even (at a free cash flow level) in about 3 years. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. Depicted below, you can see how its cash holdings have changed over time.

How Well Is RAPT Therapeutics Growing?

At first glance it's a bit worrying to see that RAPT Therapeutics actually boosted its cash burn by 24%, year on year. And we must say we find it concerning that operating revenue dropped 48% over the same period. 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 RAPT Therapeutics To Raise More Cash For Growth?

RAPT Therapeutics seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. 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.

RAPT Therapeutics' cash burn of US$70m is about 7.6% of its US$924m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is RAPT Therapeutics' Cash Burn A Worry?

On this analysis of RAPT Therapeutics' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. An in-depth examination of risks revealed 4 warning signs for RAPT Therapeutics that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.