We're Keeping An Eye On Reneo Pharmaceuticals' (NASDAQ:RPHM) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Reneo Pharmaceuticals

When Might Reneo Pharmaceuticals Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2022, Reneo Pharmaceuticals had cash of US$139m and no debt. Importantly, its cash burn was US$39m over the trailing twelve months. Therefore, from March 2022 it had 3.6 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Is Reneo Pharmaceuticals' Cash Burn Changing Over Time?

Because Reneo Pharmaceuticals isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. During the last twelve months, its cash burn actually ramped up 70%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. 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 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. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Reneo Pharmaceuticals' cash burn of US$39m is about 59% of its US$65m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About Reneo Pharmaceuticals' Cash Burn?

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. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 4 warning signs for Reneo Pharmaceuticals you should be aware of, and 1 of them is a bit unpleasant.

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.