Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
Given this risk, we thought we would examine whether Therapeutic Nektar (NASDAQ:NKTR) shareholders should be concerned about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. Let’s start with a review of the company’s cash flow, relative to its cash burn.
Check out our latest analysis for Nektar Therapeutics
How long does the Nektar Therapeutics cash trail last?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. When Nektar Therapeutics last released its balance sheet in September 2021, it had no debt and cash worth $921 million. Looking at last year, the company spent US$371 million. Therefore, as of September 2021, it had 2.5 years of cash trail. Importantly, analysts believe Nektar Therapeutics will break even before then. In this case, he may never reach the end of his cash trail. You can see how his cash balance has changed over time in the image below.
How is Nektar Therapeutics growing?
Some investors might find it troubling that Nektar Therapeutics is actually increasing its cash consumption, which has increased by 6.2% over the past year. And it is clear that we note with concern that operating revenues have fallen by 39% over the same period. Taken together, we think these growth indicators are a little worrying. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
How difficult would it be for Nektar Therapeutics to raise more funds for growth?
Nektar Therapeutics appears to be in a pretty good position in terms of cash burn, but we still think it’s worth considering how easily it could raise more cash if it wanted to. In general, a listed company can raise new funds by issuing shares or by going into debt. Typically, a company will sell new stock on its own to raise cash and drive growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
With a market capitalization of $2.3 billion, Nektar Therapeutics’ cash burn of $371 million equates to approximately 16% of its market value. As a result, we risk the company being able to raise more cash for growth without too much trouble, but at the cost of some dilution.
How risky is Nektar Therapeutics’ cash burn situation?
It may already be obvious to you that we are relatively comfortable with how Nektar Therapeutics spends its money. In particular, we think its cash trail stands out as proof that the company is on top of spending. While it must be admitted that the drop in income is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to cash consumption. It is clearly very positive to see that analysts expect the company to break even soon. Considering all the factors in this report, we are not at all worried about its cash burn, as the company appears to be well capitalized to spend as needed. A thorough examination of the risks revealed 4 warning signs for Nektar Therapeutics readers should consider before committing capital to this title.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.