We're Interested To See How Xenon Pharmaceuticals (NASDAQ:XENE) Uses Its Cash Hoard To Grow

By
Simply Wall St
Published
January 13, 2021

We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Xenon Pharmaceuticals (NASDAQ:XENE) shareholders is whether they should be concerned by its rate of 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.

Check out our latest analysis for Xenon Pharmaceuticals

Does Xenon Pharmaceuticals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Xenon Pharmaceuticals last reported its balance sheet in September 2020, it had zero debt and cash worth US$191m. In the last year, its cash burn was US$18m. So it had a very long cash runway of many years from September 2020. Importantly, though, analysts think that Xenon Pharmaceuticals will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

NasdaqGM:XENE Debt to Equity History January 13th 2021

How Well Is Xenon Pharmaceuticals Growing?

It was fairly positive to see that Xenon Pharmaceuticals reduced its cash burn by 46% during the last year. But this achievement is overshadowed by the brilliant operating revenue growth of 767%. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Xenon Pharmaceuticals Raise Cash?

While Xenon Pharmaceuticals seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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. 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.

Xenon Pharmaceuticals' cash burn of US$18m is about 3.3% of its US$524m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

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

As you can probably tell by now, we're not too worried about Xenon Pharmaceuticals' cash burn. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Xenon Pharmaceuticals that potential shareholders should take into account before putting money into a stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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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