Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Magenta Therapeutics (NASDAQ:MGTA) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’ cash, relative to its cash burn.
View our latest analysis for Magenta Therapeutics
How Long Is Magenta Therapeutics’ Cash Runway?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In September 2020, Magenta Therapeutics had US$162m in cash, and was debt-free. Looking at the last year, the company burnt through US$66m. So it had a cash runway of about 2.4 years from September 2020. Arguably, that’s a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is Magenta Therapeutics’ Cash Burn Changing Over Time?
Because Magenta Therapeutics isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 8.0% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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.
Can Magenta Therapeutics Raise More Cash Easily?
Since its cash burn is increasing (albeit only slightly), Magenta Therapeutics shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of US$395m, Magenta Therapeutics’ US$66m in cash burn equates to about 17% of its market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
So, Should We Worry About Magenta Therapeutics’ Cash Burn?
On this analysis of Magenta Therapeutics’ cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Magenta Therapeutics (1 doesn’t sit too well with us!) that you should be aware of before investing here.
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