Yahoo Finance We're Interested To See How Turning Point Therapeutics (NASDAQ:TPTX) Uses Its Cash Hoard To Grow
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. By way of example, Turning Point Therapeutics (NASDAQ:TPTX) has seen its share price rise 135% 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.
Given its strong share price performance, we think it's worthwhile for Turning Point Therapeutics shareholders to consider whether its cash burn is concerning. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. 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 Turning Point Therapeutics
When Might Turning Point Therapeutics Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2020, Turning Point Therapeutics had US$710m in cash, and was debt-free. Importantly, its cash burn was US$84m over the trailing twelve months. Therefore, from June 2020 it had 8.5 years of cash runway. Notably, however, analysts think that Turning Point Therapeutics will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Is Turning Point Therapeutics' Cash Burn Changing Over Time?
Because Turning Point Therapeutics isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. In fact, it ramped its spending strongly over the last year, increasing cash burn by 107%. With spending growing that quickly, shareholders will be hoping that the money is prudently spent. 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 Hard Would It Be For Turning Point Therapeutics To Raise More Cash For Growth?
Given its cash burn trajectory, Turning Point Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Turning Point Therapeutics has a market capitalisation of US$5.3b and burnt through US$84m last year, which is 1.6% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Turning Point Therapeutics' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Turning Point Therapeutics' cash burn. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing 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 are comfortable with. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Turning Point Therapeutics that potential shareholders should take into account before putting money into a stock.
Of course Turning Point Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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