It is easy to understand why investors are attracted to unprofitable companies. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mineral discovery. That said, unprofitable businesses are risky because they could potentially spend all of their money and end up in distress.
In view of this risk, we thought to examine whether Reneo Pharma (NASDAQ: RPHM) shareholders should be concerned about its consumption of cash. In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
Does Reneo Pharmaceuticals have a long cash flow trail?
You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. As of September 2021, Reneo Pharmaceuticals had US $ 158 million in cash and no debt. In the past year, its cash consumption amounted to US $ 33 million. This means that he had a cash flow trail of around 4.7 years as of September 2021. There is no doubt that this is a long and reassuring trail. Pictured below, you can see how his cash holdings have changed over time.
NasdaqGM: RPHM History of debt to equity January 10, 2022
How does Reneo Pharmaceuticals silver consumption change over time?
Since Reneo Pharmaceuticals does not currently generate any revenue, we consider it to be a start-up company. So while we can’t look at sales to understand growth, we can look at changes in cash consumption to understand changes in expenses over time. Over the past twelve months, its cash consumption has actually increased by 97%. Often times, increased cash consumption just means that a business is speeding up its business development, but always keep in mind that this leads to a reduction in the cash flow trail. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes perfect sense to take a look at our analyst forecasts for the company.
How easily can Reneo Pharmaceuticals raise funds?
Given its cash-consuming trajectory, Reneo Pharmaceuticals shareholders may want to consider how easily it could raise more cash, despite its strong cash track. The issuance of new shares or debt are the most common ways for a listed company to raise more money for its activity. Many companies end up issuing new shares to finance their future growth. We can compare a company’s cash consumption to its market capitalization to get an idea of how many new shares a company would need to issue to fund its one-year operations.
Reneo Pharmaceuticals’ cash consumption of US $ 33 million represents approximately 16% of its market capitalization of US $ 211 million. Given this situation, it’s fair to say that the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How risky is Reneo Pharmaceuticals’ cash flow situation?
On this analysis of Reneo Pharmaceuticals’ cash consumption, we think its cash trail was reassuring, while its growing cash consumption worries us a bit. Considering all of the factors discussed in this article, we are not too concerned about the company’s cash consumption, although we believe shareholders should keep an eye on its development. By diving deeper, we spotted 3 warning signs for Reneo Pharmaceuticals you have to be aware of that, and one of them makes us a little uncomfortable.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analysts’ forecasts)
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.