There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Infinity Pharmaceuticals (NASDAQ:INFI) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Infinity Pharmaceuticals Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Infinity Pharmaceuticals last reported its balance sheet in September 2021, it had zero debt and cash worth US$90m. In the last year, its cash burn was US$39m. So it had a cash runway of about 2.3 years from September 2021. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Well Is Infinity Pharmaceuticals Growing?
At first glance it's a bit worrying to see that Infinity Pharmaceuticals actually boosted its cash burn by 6.8%, year on year. The revenue growth of 16% gives a ray of hope, at the very least. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Infinity Pharmaceuticals Raise More Cash Easily?
Even though it seems like Infinity Pharmaceuticals is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$186m, Infinity Pharmaceuticals' US$39m in cash burn equates to about 21% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Infinity Pharmaceuticals' Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Infinity Pharmaceuticals' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Infinity Pharmaceuticals' situation. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Infinity Pharmaceuticals (1 is potentially serious!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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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