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, 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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Xenon Pharmaceuticals (NASDAQ:XENE) shareholders should 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'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Xenon Pharmaceuticals

How Long Is Xenon Pharmaceuticals' 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. As at March 2023, Xenon Pharmaceuticals had cash of US$527m and no debt. In the last year, its cash burn was US$119m. So it had a cash runway of about 4.4 years from March 2023. 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 Xenon Pharmaceuticals' Cash Burn Changing Over Time?

In our view, Xenon Pharmaceuticals doesn't yet produce significant amounts of operating revenue, since it reported just US$668k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by a very significant 73%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. 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.

Can Xenon Pharmaceuticals Raise More Cash Easily?

Given its cash burn trajectory, Xenon 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. 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$2.6b and burnt through US$119m last year, which is 4.5% 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.

Is Xenon Pharmaceuticals' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Xenon Pharmaceuticals is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Xenon Pharmaceuticals has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

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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.