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We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought wed take a look at whether Vir Biotechnology (NASDAQ:VIR) shareholders should be worried about its cash burn. In this report, we will consider the companys annual negative free cash flow, henceforth referring to it as the cash burn. Well start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Vir Biotechnology

A companys 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 2019, Vir Biotechnology had cash of US$320m and no debt. Importantly, its cash burn was US$130m over the trailing twelve months. That means it had a cash runway of about 2.5 years as of September 2019. Thats decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

Some investors might find it troubling that Vir Biotechnology is actually increasing its cash burn, which is up 39% in the last year. And we must say we find it concerning that operating revenue dropped 4.0% over the same period. Taken together, we think these growth metrics are a little worrying. 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.

Even though it seems like Vir Biotechnology is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By comparing a companys annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of US$1.6b, Vir Biotechnologys US$130m in cash burn equates to about 8.2% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another years growth by issuing some new shares to investors, or even by taking out a loan.

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Vir Biotechnologys cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, were not too worried about its rate of cash burn. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Vir Biotechnology CEO is paid..

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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Companies Like Vir Biotechnology (NASDAQ:VIR) Are In A Position To Invest In Growth - Simply Wall St

This entry was posted on January 18, 2020 at 8:45 pm and is filed under Biotechnology. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. |