We Think Xenon Pharmaceuticals (NASDAQ:XENE) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Xenon Pharmaceuticals (NASDAQ:XENE) shareholders be worried about its 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.

View our latest analysis for Xenon Pharmaceuticals

When Might Xenon Pharmaceuticals Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2021, Xenon Pharmaceuticals had cash of US$275m and no debt. Looking at the last year, the company burnt through US$58m. Therefore, from March 2021 it had 4.7 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Xenon Pharmaceuticals Growing?

It was quite stunning to see that Xenon Pharmaceuticals increased its cash burn by 447% over the last year. It seems likely that the vociferous operating revenue growth of 112% during that time may well have given management confidence to ramp investment. In light of the data above, we're fairly sanguine about the business growth trajectory. 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 Xenon Pharmaceuticals To Raise More Cash For Growth?

We are certainly impressed with the progress Xenon Pharmaceuticals 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Xenon Pharmaceuticals has a market capitalisation of US$683m and burnt through US$58m last year, which is 8.5% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Xenon Pharmaceuticals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Xenon Pharmaceuticals is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Xenon Pharmaceuticals that potential shareholders should take into account before putting money into a stock.

Of course Xenon Pharmaceuticals 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.

When trading Xenon Pharmaceuticals or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.