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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Praxis Precision Medicines (NASDAQ:PRAX) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Praxis Precision Medicines
How Long Is Praxis Precision Medicines' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Praxis Precision Medicines last reported its balance sheet in June 2022, it had zero debt and cash worth US$165m. Looking at the last year, the company burnt through US$182m. Therefore, from June 2022 it had roughly 11 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Praxis Precision Medicines' Cash Burn Changing Over Time?
Because Praxis Precision Medicines isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 102%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. 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 Praxis Precision Medicines Raise Cash?
Since its cash burn is moving in the wrong direction, Praxis Precision Medicines shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.