Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Mirati Therapeutics (NASDAQ:MRTX) 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'.
View our latest analysis for Mirati Therapeutics
Does Mirati Therapeutics Have A Long Cash Runway?
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. When Mirati Therapeutics last reported its balance sheet in June 2019, it had zero debt and cash worth US$489m. In the last year, its cash burn was US$114m. That means it had a cash runway of about 4.3 years as of June 2019. Notably, however, analysts think that Mirati Therapeutics will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
How Well Is Mirati Therapeutics Growing?
Mirati Therapeutics actually ramped up its cash burn by a whopping 97% in the last year, which shows it is boosting investment in the business. While that's concerning on it's own, the fact that operating revenue was actually down 44% over the same period makes us positively tremulous. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Mirati Therapeutics Raise More Cash Easily?
While Mirati Therapeutics seems to be in a fairly good position, 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 for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.