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Just because a business does not make any money, does not mean that the stock will go down. By way of example, Design Therapeutics (NASDAQ:DSGN) has seen its share price rise 160% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it's well worth asking whether Design Therapeutics' cash 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Design Therapeutics
Does Design Therapeutics Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2024, Design Therapeutics had US$261m in cash, and was debt-free. In the last year, its cash burn was US$51m. So it had a cash runway of about 5.1 years from June 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Is Design Therapeutics' Cash Burn Changing Over Time?
Because Design Therapeutics 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. As it happens, the company's cash burn reduced by 16% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. 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.
Can Design Therapeutics Raise More Cash Easily?
While Design Therapeutics is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster 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.