Business growth

We think Pardes Biosciences (NASDAQ:PRDS) needs to drive its business growth cautiously.

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, although posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.

So the natural question for Pardes Biosciences (NASDAQ:PRDS) shareholders is whether they should be concerned about its cash burn rate. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.

How long does the Pardes Biosciences cash trail last?

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, Pardes Biosciences had $229 million in cash and no debt. Importantly, its cash burn was US$67 million over the last twelve months. Therefore, as of June 2022, it had 3.4 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.

NasdaqGM: PRDS Debt to Equity History October 18, 2022

How is Pardes Biosciences’ cash burn changing over time?

Pardes Biosciences has not recorded any turnover in the last year, indicating that it is a start-up company that is still developing its activity. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. Its cash consumption exploded positively last year, up 394%. With this type of expense growth, its cash trail will quickly shorten, as it simultaneously uses up its cash while increasing the rate of consumption. Obviously, however, the crucial factor is whether the company will expand its business in the future. So you might want to take a look at how much the business is expected to grow in the next few years.

Can Pardes Biosciences raise more money easily?

Although Pardes 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 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.

Pardes Biosciences has a market capitalization of $87 million and spent $67 million last year, or 77% of the company’s market value. Given the scale of this cash burn relative to the market value of the entire company, we would consider this a high-risk stock, with the real possibility of extreme dilution. .

Is Pardes Biosciences’ cash consumption a concern?

Even though its increasing consumption of cash makes us a bit nervous, we are bound to mention that we thought the cash trail of Pardes Biosciences was relatively promising. We don’t think its cash burn is particularly problematic, but after considering the range of factors discussed in this article, we think shareholders should monitor its evolution over time. In addition, Pardes Biosciences has 5 warning signs (and 2 that don’t suit us too much) we think you should know.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analyst forecasts)

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.