Yahoo Finance We're Hopeful That Allogene Therapeutics (NASDAQ:ALLO) Will Use Its Cash Wisely
We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Allogene Therapeutics (NASDAQ:ALLO) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for Allogene Therapeutics
When Might Allogene Therapeutics Run Out Of Money?
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 2021, Allogene Therapeutics had US$483m in cash, and was debt-free. Looking at the last year, the company burnt through US$187m. So it had a cash runway of about 2.6 years from September 2021. Notably, analysts forecast that Allogene Therapeutics will break even (at a free cash flow level) in about 5 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.
How Is Allogene Therapeutics' Cash Burn Changing Over Time?
In our view, Allogene Therapeutics doesn't yet produce significant amounts of operating revenue, since it reported just US$38m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 14% 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. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Allogene Therapeutics Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Allogene Therapeutics to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Allogene Therapeutics' cash burn of US$187m is about 9.8% of its US$1.9b market capitalisation. 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 Allogene Therapeutics' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Allogene Therapeutics is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Shareholders can take heart from the fact that analysts are forecasting it 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Allogene Therapeutics that investors should know when investing in the stock.
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)
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.
