We're Hopeful That Zentalis Pharmaceuticals (NASDAQ:ZNTL) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Zentalis Pharmaceuticals (NASDAQ:ZNTL) shareholders should 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Zentalis Pharmaceuticals

Does Zentalis Pharmaceuticals Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Zentalis Pharmaceuticals last reported its March 2024 balance sheet in May 2024, it had zero debt and cash worth US$489m. In the last year, its cash burn was US$211m. Therefore, from March 2024 it had 2.3 years of cash runway. Notably, analysts forecast that Zentalis Pharmaceuticals will break even (at a free cash flow level) in about 5 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 Zentalis Pharmaceuticals' Cash Burn Changing Over Time?

In our view, Zentalis Pharmaceuticals doesn't yet produce significant amounts of operating revenue, since it reported just US$41m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 28% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 Hard Would It Be For Zentalis Pharmaceuticals To Raise More Cash For Growth?

Given its cash burn trajectory, Zentalis 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. 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.

Zentalis Pharmaceuticals' cash burn of US$211m is about 30% of its US$709m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Zentalis Pharmaceuticals' Cash Burn A Worry?

On this analysis of Zentalis Pharmaceuticals' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking an in-depth view of risks, we've identified 2 warning signs for Zentalis Pharmaceuticals 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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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.