Yahoo Finance We Think Zentalis Pharmaceuticals (NASDAQ:ZNTL) Can Afford To Drive Business Growth
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, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Zentalis Pharmaceuticals (NASDAQ:ZNTL) shareholders should 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'. 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 Zentalis Pharmaceuticals
Does Zentalis Pharmaceuticals Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In March 2024, Zentalis Pharmaceuticals had US$489m in cash, and was debt-free. Importantly, its cash burn was US$211m over the trailing twelve months. That means it had a cash runway of about 2.3 years as of March 2024. Notably, analysts forecast that Zentalis Pharmaceuticals will break even (at a free cash flow level) in about 5 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Is Zentalis Pharmaceuticals' Cash Burn Changing Over Time?
Whilst it's great to see that Zentalis Pharmaceuticals has already begun generating revenue from operations, last year it only produced US$41m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 28% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Zentalis Pharmaceuticals Raise More Cash Easily?
While Zentalis Pharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Zentalis Pharmaceuticals' cash burn of US$211m is about 25% of its US$844m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Zentalis Pharmaceuticals' Cash Burn?
On this analysis of Zentalis Pharmaceuticals' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Zentalis Pharmaceuticals that investors should know when investing in the stock.
Of course Zentalis Pharmaceuticals 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 with high insider ownership.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
