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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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 LianBio (NASDAQ:LIAN) shareholders should be worried about its 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’ cash, relative to its cash burn.
How Long Is LianBio’s 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 December 2021, LianBio had cash of US$383m and no debt. In the last year, its cash burn was US$165m. So it had a cash runway of about 2.3 years from December 2021. Arguably, that’s a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Is LianBio’s Cash Burn Changing Over Time?
LianBio didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 67%. 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 LianBio Raise More Cash Easily?
While LianBio does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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.
LianBio has a market capitalisation of US$264m and burnt through US$165m last year, which is 62% of the company’s market value. Given how large that cash burn is, relative to the market value of the entire company, we’d consider it to be a high risk stock, with the real possibility of extreme dilution.
Is LianBio’s Cash Burn A Worry?
On this analysis of LianBio’s cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. 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, we conducted an in-depth investigation of the company, and identified 3 warning signs for LianBio (1 can’t be ignored!) that you should be aware of before investing here.
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.