We can readily understand why investors are attracted to unprofitable companies. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
NYSEMKT:PFNX) shareholders should be worried about its cash burn. 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.” data-reactid=”29″ type=”text”>Given this risk, we thought we’d take a look at whether Pfenex (NYSEMKT:PFNX) shareholders should be worried about its cash burn. 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is Pfenex’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In June 2020, Pfenex had US$61m in cash, and was debt-free. In the last year, its cash burn was US$6.1m. So it had a cash runway of about 10.0 years from June 2020. Importantly, though, analysts think that Pfenex will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Pfenex Growing?
our analyst forecasts for the company.” data-reactid=”50″ type=”text”>Pfenex managed to reduce its cash burn by 84% over the last twelve months, which suggests it’s on the right flight path. And it is also great to see that the revenue is up a stonking 134% in the same time period. Considering these factors, we’re fairly impressed by its growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Pfenex To Raise More Cash For Growth?
We are certainly impressed with the progress Pfenex has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of US$263m, Pfenex’s US$6.1m in cash burn equates to about 2.3% of its market value. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
Is Pfenex’s Cash Burn A Worry?
2 warning signs for Pfenex that you should be aware of before investing.” data-reactid=”55″ type=”text”>As you can probably tell by now, we’re not too worried about Pfenex’s cash burn. For example, we think its revenue growth suggests that the company is on a good path. But it’s fair to say that its cash burn relative to its market cap was also very reassuring. It’s clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we’re pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking an in-depth view of risks, we’ve identified 2 warning signs for Pfenex that you should be aware of before investing.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.