Companies Like Zynerba Pharmaceuticals (NASDAQ:ZYNE) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Zynerba Pharmaceuticals (NASDAQ:ZYNE) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let’s start with an examination of the business’s cash, relative to its cash burn.

See our latest analysis for Zynerba Pharmaceuticals

When Might Zynerba Pharmaceuticals Run Out Of Money?

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. Zynerba Pharmaceuticals has such a small amount of debt that we’ll set it aside, and focus on the US$89m in cash it held at June 2019. In the last year, its cash burn was US$30m. That means it had a cash runway of about 3.0 years as of June 2019. Importantly, analysts think that Zynerba Pharmaceuticals will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

NasdaqGM:ZYNE Historical Debt, September 18th 2019
NasdaqGM:ZYNE Historical Debt, September 18th 2019

How Is Zynerba Pharmaceuticals’s Cash Burn Changing Over Time?

Whilst it’s great to see that Zynerba Pharmaceuticals has already begun generating revenue from operations, last year it only produced US$86k, so we don’t think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. 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.

Can Zynerba Pharmaceuticals Raise More Cash Easily?

While Zynerba Pharmaceuticals is showing a solid reduction in its cash burn, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.

Zynerba Pharmaceuticals has a market capitalisation of US$262m and burnt through US$30m last year, which is 11% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but there’s a good chance shareholders would be somewhat diluted.

Is Zynerba Pharmaceuticals’s Cash Burn A Worry?

It may already be apparent to you that we’re relatively comfortable with the way Zynerba 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. Its weak point is its cash burn reduction, but even that wasn’t too bad! Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Zynerba Pharmaceuticals CEO is paid..

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)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.