Is Reneo Pharmaceuticals (NASDAQ:RPHM) In A Good Position To Deliver On Growth Plans?

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Reneo Pharmaceuticals (NASDAQ:RPHM) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out the opportunities and risks within the US Biotechs industry.

When Might Reneo Pharmaceuticals 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 September 2022, Reneo Pharmaceuticals had US$116m in cash, and was debt-free. In the last year, its cash burn was US$42m. Therefore, from September 2022 it had 2.8 years of cash runway. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Is Reneo Pharmaceuticals' Cash Burn Changing Over Time?

Because Reneo Pharmaceuticals isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 25% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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.

How Hard Would It Be For Reneo Pharmaceuticals To Raise More Cash For Growth?

Given its cash burn trajectory, Reneo Pharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. 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.

Reneo Pharmaceuticals' cash burn of US$42m is about 77% of its US$54m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

How Risky Is Reneo Pharmaceuticals' 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 Reneo Pharmaceuticals' cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, Reneo Pharmaceuticals has 4 warning signs (and 1 which is concerning) we think you should know about.

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)

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.