While it’s true that owning shares of unprofitable businesses can be a lucrative investment, as seen with Corvus Pharmaceuticals’ (NASDAQ:CRVS) 168% share price growth over the last year. However, it’s essential to consider the risks associated with investing in companies that are burning through cash and may become distressed.
Defining Cash Burn
In this article, we’ll focus on calculating a company’s cash burn, which is its annual (negative) free cash flow. This metric represents the amount of money a company spends each year to fund its growth.
Corvus Pharmaceuticals: A Closer Look
Let’s examine Corvus Pharmaceuticals’ cash burn and its potential impact on the company’s future. As at September 2024, Corvus Pharmaceuticals had cash reserves of US$42m and no debt. However, its cash burn was a significant US$22m over the trailing twelve months.
Calculating Cash Runway
To estimate how long Corvus Pharmaceuticals’ cash hoard will last, we’ll divide its cash reserves by its cash burn. Based on these numbers, the company had approximately 23 months of cash runway as at September 2024. However, it’s essential to note that analysts predict the company will reach cashflow breakeven before then.
How is Corvus Pharmaceuticals’ Cash Burn Changing Over Time?
As an early-stage company still developing its business, Corvus Pharmaceuticals didn’t record any revenue over the last year. However, we can analyze how its cash burn has changed over time to understand the trend in expenditure.
According to our analysis, Corvus Pharmaceuticals’ cash burn reduced by 16% over the last year. While this is a positive sign, it’s crucial to consider whether the company will be able to grow its business going forward.
Can Corvus Pharmaceuticals Raise More Cash Easily?
While Corvus Pharmaceuticals has shown a solid reduction in its cash burn, it’s still essential to examine how easily it can raise more capital. Issuing new shares or taking on debt are common methods for companies to fund future growth.
To assess the company’s ability to raise more cash, we’ll compare its cash burn to its market capitalization. With a market cap of US$375m and a cash burn of US$22m, Corvus Pharmaceuticals’ cash burn equates to approximately 5.9% of its market value. This suggests that the company would be able to raise more capital with minimal dilution or even through borrowing.
How Risky is Corvus Pharmaceuticals’ Cash Burn Situation?
Given our analysis, we’re not too concerned about Corvus Pharmaceuticals’ cash burn situation. The company’s low cash burn relative to its market cap indicates that it’s on a good path. While the reduction in cash burn is a minor concern, analysts predict the company will break even fairly soon.
Conclusion
In conclusion, while owning shares of unprofitable businesses can be lucrative, it’s essential to consider the risks associated with investing in companies that are burning through cash. Corvus Pharmaceuticals’ cash burn situation appears well-managed, and we’re not too worried about its prospects.
However, as always, there are potential risks involved. We’ve identified 4 warning signs for Corvus Pharmaceuticals that you should be aware of.
If you’d like to explore other investment opportunities, take a look at our list of companies with significant insider holdings or growth stocks (according to analyst forecasts).
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This article by Simply Wall St is general in nature and provides commentary based on historical data and analyst forecasts only using an unbiased methodology. Our articles are not intended to be financial advice and do not constitute a recommendation to buy or sell any stock. We aim to bring you long-term focused analysis driven by fundamental data, which may not factor in the latest price-sensitive company announcements or qualitative material.
Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.