Companies Like Verve Therapeutics (NASDAQ:VERV) Are In A Position To Invest In Growth

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Verve Therapeutics (NASDAQ:VERV) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Verve Therapeutics

When Might Verve Therapeutics Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Verve Therapeutics last reported its December 2023 balance sheet in February 2024, it had zero debt and cash worth US$624m. Importantly, its cash burn was US$159m over the trailing twelve months. Therefore, from December 2023 it had 3.9 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Verve Therapeutics Growing?

Some investors might find it troubling that Verve Therapeutics is actually increasing its cash burn, which is up 17% in the last year. Given that it boosted operating revenue by a stand-out 506% in the same period, we think management are simply more focussed on growth than preserving cash. It may well be that it has some excellent opportunities to invest in growth. It seems to be growing nicely. 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 Easily Can Verve Therapeutics Raise Cash?

We are certainly impressed with the progress Verve Therapeutics has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Verve Therapeutics has a market capitalisation of US$1.2b and burnt through US$159m last year, which is 14% of the company's market value. 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 Verve Therapeutics' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Verve Therapeutics is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Verve Therapeutics (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course Verve Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.