We can easily understand why investors are attracted to unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
So the natural question for CinCor Pharma (NASDAQ:CINC) shareholders is whether they should be concerned about its cash burn rate. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
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When could CinCor Pharma run out of money?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. When CinCor Pharma released its last balance sheet in September 2022, it had no debt and cash worth $522 million. Last year, its cash burn was $64 million. This means that it had a cash trail of around 8.1 years in September 2022. While this is only a measure of its cash burn situation, it certainly gives us the impression that holders have nothing to fear. Below you can see how its liquidity has changed over time.
How is CinCor Pharma’s cash burn changing over time?
Since CinCor Pharma is not currently generating revenue, we consider it to be an early-stage business. Nonetheless, we can still look at its cash burn trajectory as part of our assessment of its cash burn situation. In fact, he has dramatically increased his spending over the past year, increasing cash burn by 168%. With spending growing so rapidly, shareholders are hoping the cash will be spent wisely. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
Can CinCor Pharma raise more money easily?
Given its cash burn trajectory, CinCor Pharma shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
CinCor Pharma’s cash burn of US$64 million represents approximately 4.9% of its market capitalization of US$1.3 billion. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
So should we be worried about CinCor Pharma’s cash burn?
It may already be obvious to you that we are relatively comfortable with the way CinCor Pharma is burning cash. For example, we think its cash trail suggests the business is on the right track. While we find its growing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we’re comfortable with. After considering the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its money, as it appears to be on track to meet its medium-term needs. On a different note, we conducted a thorough investigation of the company and identified 2 warning signs for CinCor Pharma (1 is significant!) which you should be aware of before investing here.
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