Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Zymeworks (NASDAQ:ZYME) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let’s start with an examination of the business’ cash, relative to its cash burn.
View our latest analysis for Zymeworks
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2024, Zymeworks had cash of US$297m and no debt. In the last year, its cash burn was US$59m. Therefore, from September 2024 it had 5.0 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because Zymeworks actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The bad news for shareholders is that operating revenue actually plummeted 87% in the last year, which is a real concern in our view. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Since its revenue growth is moving in the wrong direction, Zymeworks shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
