We're Not Very Worried About Reneo Pharmaceuticals' (NASDAQ:RPHM) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Reneo Pharmaceuticals (NASDAQ:RPHM) stock is up 102% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Reneo Pharmaceuticals' cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Reneo Pharmaceuticals

When Might Reneo Pharmaceuticals Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2023, Reneo Pharmaceuticals had cash of US$143m and no debt. Importantly, its cash burn was US$52m over the trailing twelve months. Therefore, from June 2023 it had 2.7 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Is Reneo Pharmaceuticals' Cash Burn Changing Over Time?

Reneo Pharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With the cash burn rate up 27% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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. 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.

Reneo Pharmaceuticals has a market capitalisation of US$257m and burnt through US$52m last year, which is 20% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

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

On this analysis of Reneo Pharmaceuticals' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Reneo Pharmaceuticals (of which 1 shouldn't be ignored!) you should know about.

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.

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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.