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. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
Given this risk, we thought we would examine whether For Biopharma (NASDAQ:VOR) shareholders should be concerned about its cash burn. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to finance 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.
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When could Vor Biopharma run out of money?
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 June 2022, Vor Biopharma had $151 million in cash and no debt. Looking at last year, the company spent US$92 million. So he had a cash trail of about 20 months from June 2022. Not too bad, but it’s fair to say that the end of the cash trail is in sight, unless the consumption of cash does drastically decrease. The image below shows how his cash balance has changed over the past few years.
How is Vor Biopharma’s cash burn changing over time?
Since Vor Biopharma is not currently generating revenue, we consider it to be an early-stage business. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. Over the past twelve months, its cash burn has actually increased by 51%. Often an increase in cash burn simply means a company is accelerating its business development, but always keep in mind that this reduces the cash trail. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
How difficult would it be for Vor Biopharma to raise more funds for growth?
Although Vor Biopharma 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. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their 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 $158 million, Vor Biopharma’s cash burn of $92 million equates to approximately 59% of its market value. These are high expenses relative to the value of the entire company, so if it has to issue stock to fund further growth, it could end up hurting shareholder returns significantly (through significant dilution).
How risky is Vor Biopharma’s cash burn situation?
Even though its cash burn relative to its market capitalization makes us a little nervous, we are bound to mention that we thought Vor Biopharma’s cash trail was relatively promising. In summary, we believe Vor Biopharma’s cash burn is a risk, based on the factors we’ve mentioned in this article. On a different note, we conducted a thorough investigation of the company and identified 4 warning signs for Vor Biopharma (2 are a little nasty!) that you should be aware of before investing here.
Sure Vor Biopharma may not be the best stock to buy. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
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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.