Just because a business isn’t making money doesn’t mean the stock will go down. For example, although Amazon.com suffered losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
So the natural question for Rain therapy (NASDAQ: RAIN) shareholders is whether they should be concerned with its rate of cash consumption. For the purposes of this article, we’ll define cash consumption as the amount of cash the business spends each year to finance its growth (also known as negative free cash flow). We will start by comparing its cash consumption with its cash reserves in order to calculate its cash flow track.
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Does Rain Therapeutics have a long cash flow trail?
A cash flow trail is defined as the time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. When Rain Therapeutics last released its balance sheet in September 2021, it had no debt and $ 150 million in cash. Importantly, his cash consumption was US $ 35 million in the past twelve months. Therefore, as of September 2021, he had 4.3 years of cash flow. A lead of this length gives the company the time and space it needs to develop its business. The image below shows how his cash balance has evolved over the past few years.
How does Rain Therapeutics’ silver consumption change over time?
Rain Therapeutics has not recorded any sales over the past year, indicating that it is a start-up company that continues to grow its business. Nonetheless, we can still examine its cash consumption trajectory as part of our assessment of its cash consumption situation. The staggering 130% year-over-year increase in liquidity certainly puts our nerves to the test. With spending growing so rapidly, shareholders are hoping the money is being spent wisely. While the past is always worth studying, it is the future that matters most. You might want to take a look at how the business is expected to grow over the next few years.
How easily can Rain Therapeutics raise funds?
While Rain Therapeutics has a strong cash flow trail, its cash-consuming trajectory may cause some shareholders to reflect on when the company might need to raise more cash. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Typically, a company itself will sell new stocks to raise funds and drive growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Rain Therapeutics has a market capitalization of US $ 374 million and spent US $ 35 million last year, representing 9.3% of the company’s market value. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.
Is Rain Therapeutics’ Cash Burn a Problem?
It may already be obvious to you that we are relatively comfortable with the way Rain Therapeutics burns its money. In particular, we believe that its cash flow track stands out as proof that the company has good control over its spending. While we find its growing cash consumption to be a bit negative, once we consider the other metrics mentioned in this article together, the overall picture is one we’re comfortable with. 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. On another note, Rain Therapeutics has 3 warning signs (and 2 which don’t suit us very well) we think you should be aware of.
If you’d rather discover another business with better fundamentals, don’t miss this free list of interesting companies that have HIGH ROE and low debt or this list of stocks that are all expected to grow.
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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.