Just because a business does not make any money, does not mean that the stock will go down. By way of example, MyoKardia (NASDAQ:MYOK) has seen its share price rise 167% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So notwithstanding the buoyant share price, we think it's well worth asking whether MyoKardia'scash burn is too risky 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'.
Check out our latest analysis for MyoKardia
When Might MyoKardia Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2020, MyoKardia had US$918m in cash, and was debt-free. Importantly, its cash burn was US$305m over the trailing twelve months. So it had a cash runway of about 3.0 years from June 2020. There's no doubt that this is a reassuringly long runway. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. The image below shows how its cash balance has been changing over the last few years.
How Well Is MyoKardia Growing?
One thing for shareholders to keep front in mind is that MyoKardia increased its cash burn by 200% in the last twelve months. While that's concerning on it's own, the fact that operating revenue was actually down 43% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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.
How Hard Would It Be For MyoKardia To Raise More Cash For Growth?
Even though it seems like MyoKardia is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of US$7.4b, MyoKardia's US$305m in cash burn equates to about 4.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.