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, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.
So the natural question for Therapeutic relay (NASDAQ:RLAY) shareholders is whether they should be concerned about its cash burn rate. 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. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
When could Relay Therapeutics run out of money?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. As of June 2022, Relay Therapeutics had cash of US$838 million and no debt. Importantly, its cash burn was US$206 million over the last twelve months. Therefore, as of June 2022, it had 4.1 years of cash trail. There is no doubt that this is a reassuringly long track. Below you can see how its liquidity has changed over time.
How is Relay Therapeutics growing?
One thing shareholders should keep in mind is that Relay Therapeutics has increased its cash burn by 390% over the past twelve months. It’s bad enough, but the 98% decline in operating income signals a period of uncertainty and, very potentially, increased risk for holders.” Considering these two factors together makes us nervous about the direction that society seems to be taking in. While the past is always worth looking into, it’s the future that matters most, which is why it makes a lot of sense to take a look at it. our analyst forecasts for the company.
Can Relay Therapeutics raise more money easily?
Even though it looks like Relay Therapeutics is growing its business well, we still like to consider how easily it could raise more money to accelerate growth. 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 cap, we get 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.
Relay Therapeutics’ cash burn of $206 million represents about 8.3% of its market capitalization of $2.5 billion. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
So should we be worried about Relay Therapeutics’ cash burn?
Even though the decline in its revenue makes us a bit nervous, we are bound to mention that we thought Relay Therapeutics’ cash trail was relatively promising. While we don’t think it has a problem with its cash burn, the analysis we’ve done in this article suggests that shareholders should think carefully about the potential cost of raising more money in the future. On another note, Relay Therapeutics has 6 warning signs (and 1 that makes us a little uncomfortable) we think you should know.
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