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We can readily understand why investors are attracted to unprofitable companies. 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.
So should Infinity Pharmaceuticals (NASDAQ:INFI) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Infinity Pharmaceuticals' 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. As at March 2022, Infinity Pharmaceuticals had cash of US$67m and no debt. In the last year, its cash burn was US$41m. Therefore, from March 2022 it had roughly 20 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
How Well Is Infinity Pharmaceuticals Growing?
Some investors might find it troubling that Infinity Pharmaceuticals is actually increasing its cash burn, which is up 8.7% in the last year. At least the revenue was up 16% during the period, even if it wasn't up by much. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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.
Can Infinity Pharmaceuticals Raise More Cash Easily?
Even though it seems like Infinity Pharmaceuticals is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. 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.
Infinity Pharmaceuticals has a market capitalisation of US$60m and burnt through US$41m last year, which is 67% of the company's market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
How Risky Is Infinity Pharmaceuticals' Cash Burn Situation?
On this analysis of Infinity Pharmaceuticals' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Infinity Pharmaceuticals' cash burn is a risk, based on the factors we mentioned in this article. On another note, Infinity Pharmaceuticals has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
Of course Infinity Pharmaceuticals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.