Here's Why We're Watching Zynerba Pharmaceuticals' (NASDAQ:ZYNE) Cash Burn Situation

By
Simply Wall St
Published
March 23, 2022
NasdaqGM:ZYNE
Source: Shutterstock

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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?

So, the natural question for Zynerba Pharmaceuticals (NASDAQ:ZYNE) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Zynerba Pharmaceuticals

How Long Is Zynerba Pharmaceuticals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2021, Zynerba Pharmaceuticals had cash of US$68m and no debt. Importantly, its cash burn was US$34m over the trailing twelve months. Therefore, from December 2021 it had 2.0 years of cash runway. Importantly, analysts think that Zynerba Pharmaceuticals will reach cashflow breakeven in 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.

debt-equity-history-analysis
NasdaqGM:ZYNE Debt to Equity History March 23rd 2022

How Is Zynerba Pharmaceuticals' Cash Burn Changing Over Time?

Because Zynerba Pharmaceuticals isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. As it happens, the company's cash burn reduced by 20% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Zynerba Pharmaceuticals To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Zynerba Pharmaceuticals to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Zynerba Pharmaceuticals' cash burn of US$34m is about 39% of its US$86m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Zynerba Pharmaceuticals' Cash Burn Situation?

On this analysis of Zynerba Pharmaceuticals' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Zynerba Pharmaceuticals has 4 warning signs (and 1 which is concerning) we think you should know about.

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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