There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
So the natural question for Ventyx Biosciences (NASDAQ:VTYX) shareholders is whether they should be concerned about its cash burn rate. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to fund its growth (also known as negative free cash flow). First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
Discover our latest analyzes for Ventyx Biosciences
Does Ventyx Biosciences have a long cash trail?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of September 2021, Ventyx Biosciences had cash of US$142 million and no debt. Looking at last year, the company burned 26 million US dollars. This means that it had a cash trail of around 5.4 years as of September 2021. While this is only a measure of the company’s cash burn, the idea of a so long trail of cash warms our bellies in a comforting way. Below you can see how its liquidity has changed over time.
How is Ventyx Biosciences cash burn changing over time?
Since Ventyx Biosciences is not currently generating revenue, we consider it to be an early-stage company. Nonetheless, we can still look at its cash burn trajectory as part of our assessment of its cash burn situation. Remarkably, it has actually increased its cash burn by 391% over the past year. This kind of surge in spending can pay off, but is generally considered quite risky. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
How easily can Ventyx Biosciences raise funds?
Although Ventyx Biosciences has a strong cash trail, its cash burn trajectory may cause some shareholders to think ahead to when the company might need to raise more cash. 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 comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
With a market capitalization of $726 million, Ventyx Biosciences’ cash burn of $26 million equates to approximately 3.6% of its market value. This is a small proportion, so we think the company would be able to raise more cash to fund growth, with a bit of dilution, or even just borrow money.
How risky is Ventyx Biosciences’ cash burn situation?
It may already be obvious to you that we are relatively comfortable with the way Ventyx Biosciences burns its cash. In particular, we think its cash trail stands out as proof that the company is on top of spending. While it must be admitted that its growing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to cash burn. After considering the various metrics mentioned in this report, we are quite comfortable with how the company is spending its money, as it appears to be on track to meet its medium-term needs. Taking a deeper dive, we spotted 3 warning signs for Ventyx Biosciences you need to be aware of, and 1 of them can’t be ignored.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.