Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Xenon Pharmaceuticals (NASDAQ:XENE) 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). Let's start with an examination of the business' cash, relative to its cash burn.
Does Xenon 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. In September 2022, Xenon Pharmaceuticals had US$638m in cash, and was debt-free. Importantly, its cash burn was US$88m over the trailing twelve months. That means it had a cash runway of about 7.2 years as of September 2022. Importantly, though, analysts think that Xenon Pharmaceuticals will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Xenon Pharmaceuticals Growing?
Some investors might find it troubling that Xenon Pharmaceuticals is actually increasing its cash burn, which is up 37% in the last year. Also concerning, operating revenue was actually down by 34% in that time. Taken together, we think these growth metrics are a little worrying. 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.
How Hard Would It Be For Xenon Pharmaceuticals To Raise More Cash For Growth?
Even though it seems like Xenon Pharmaceuticals is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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. 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.
Xenon Pharmaceuticals has a market capitalisation of US$2.5b and burnt through US$88m last year, which is 3.5% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Xenon Pharmaceuticals' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Xenon Pharmaceuticals' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Xenon Pharmaceuticals that potential shareholders should take into account before putting money into a stock.
Of course Xenon 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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