We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Beam Therapeutics (NASDAQ:BEAM) shareholders be worried about its 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.
Check out our latest analysis for Beam Therapeutics
When Might Beam Therapeutics Run Out Of Money?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2020, Beam Therapeutics had cash of US$228m and no debt. In the last year, its cash burn was US$94m. Therefore, from June 2020 it had 2.4 years of cash runway. That’s decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Is Beam Therapeutics’ Cash Burn Changing Over Time?
In our view, Beam Therapeutics doesn’t yet produce significant amounts of operating revenue, since it reported just US$24k in the last twelve months. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. Over the last year its cash burn actually increased by 33%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Beam Therapeutics Raise Cash?
While Beam Therapeutics does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Beam Therapeutics’ cash burn of US$94m is about 5.0% of its US$1.9b market capitalisation. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Beam Therapeutics’ Cash Burn A Worry?
It may already be apparent to you that we’re relatively comfortable with the way Beam Therapeutics is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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, Beam Therapeutics has 4 warning signs (and 2 which are concerning) we think you should know about.
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This article by Simply Wall St is general in nature. 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.
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