Just because a company isn’t making money doesn’t mean its stock will fall. For example, while software-as-a-service company Salesforce.com has lost money for years while growing recurring revenue, you would have done very well if you had owned shares since 2005. But the harsh reality is that many loss-making companies burn through all their money and go bankrupt.
Given this risk, we thought we’d see if that was the case Passage biography (NASDAQ:PASG) shareholders should be concerned about cash burn. In this article, we define cash burn as annual (negative) free cash flow, the amount of money a company spends annually to finance its growth. First, we will determine cash runway by comparing cash burn to cash reserves.
Check out our latest analysis for Passage Bio
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As of September 2024, Passage Bio had cash of $85 million and no debt. Importantly, its cash burn over the last twelve months was $59 million. Therefore, it had about 17 months of cash runway as of September 2024. That’s not a big deal, but it’s fair to say that the end of the cash runway is in sight unless cash burn decreases dramatically. In the image below you can see how the cash balance has changed over time.
Because Passage Bio is not currently generating revenue, we consider it an early-stage venture. So while we can’t look at revenue to understand growth, we can look at how cash burn is changing to understand how expenses are trending over time. While it doesn’t get us excited, the 29% annualized cash burn decline suggests the company can continue to operate for quite some time. However, it is clear that the crucial factor is whether the company will grow its business in the future. For that reason, it makes sense to look at our analyst forecasts for the company.
While Passage Bio is showing a solid reduction in cash burn, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares or taking on debt are the most common ways a publicly traded company can raise more money for its operations. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise money and finance 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 going for another year (at the same burn rate).
