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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should UroGen Pharma (NASDAQ:URGN) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is UroGen Pharma's Cash Runway?
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. In September 2020, UroGen Pharma had US$120m in cash, and was debt-free. Importantly, its cash burn was US$112m over the trailing twelve months. That means it had a cash runway of around 13 months as of September 2020. Importantly, analysts think that UroGen Pharma will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is UroGen Pharma's Cash Burn Changing Over Time?
Whilst it's great to see that UroGen Pharma has already begun generating revenue from operations, last year it only produced US$3.8m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. In fact, it ramped its spending strongly over the last year, increasing cash burn by 101%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can UroGen Pharma Raise Cash?
While UroGen Pharma does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
UroGen Pharma's cash burn of US$112m is about 19% of its US$595m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
So, Should We Worry About UroGen Pharma's Cash Burn?
On this analysis of UroGen Pharma's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Summing up, we think the UroGen Pharma'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 3 warning signs for UroGen Pharma 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 interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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What are the risks and opportunities for UroGen Pharma?
Trading at 95.1% below our estimate of its fair value
Earnings are forecast to grow 56.11% per year
Negative shareholders equity
Shareholders have been diluted in the past year
This article by Simply Wall St is general in nature. 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.
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