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There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Zai Lab (NASDAQ:ZLAB) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Zai Lab
When Might Zai Lab Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2022, Zai Lab had US$1.1b in cash, and was debt-free. In the last year, its cash burn was US$438m. So it had a cash runway of about 2.6 years from September 2022. Importantly, analysts think that Zai Lab will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Zai Lab Growing?
Zai Lab reduced its cash burn by 4.4% during the last year, which points to some degree of discipline. Having said that, the revenue growth of 71% was considerably more inspiring. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Zai Lab Raise Cash?
There's no doubt Zai Lab seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund 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 and fund growth. By comparing a company's 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).
Zai Lab has a market capitalisation of US$2.9b and burnt through US$438m last year, which is 15% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.