We’re not terribly worried about Rhythm Pharmaceuticals’ (NASDAQ:RYTM) cash burn rate
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.
Given this risk, we thought we would examine whether Rhythm Pharmaceuticals (NASDAQ:RYTM) shareholders should be concerned about its cash burn. 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. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
Check out our latest analysis for Rhythm Pharmaceuticals
When could Rhythm Pharmaceuticals run out of money?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. When Rhythm Pharmaceuticals last released its balance sheet in September 2021, it had no debt and cash worth $328 million. Looking at last year, the company spent US$135 million. It therefore had a cash trail of approximately 2.4 years as of September 2021. Notably, analysts expect Rhythm Pharmaceuticals to break even (at the level of free cash flow) in approximately 3 years. There is therefore a very good chance that he will not need more money, considering that the rate of consumption will decrease during this period. You can see how his cash balance has changed over time in the image below.
How is Rhythm Pharmaceuticals cash burn changing over time?
While it’s good to see that Rhythm Pharmaceuticals has already started generating operating revenue, last year it only made US$1.3 million, so we don’t think it’s generating significant revenue at this stage. Therefore, we believe it is a little early to focus on revenue growth, so we will limit ourselves to looking at how cash burn has evolved over time. Over the past year, its cash burn has actually increased by 7.9%, suggesting that management is increasing its investments in future growth, but not too quickly. However, the company’s true cash trail will therefore be shorter than suggested above, if expenses continue to rise. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
How difficult would it be for Rhythm Pharmaceuticals to raise more funds for growth?
Although its cash burn is only increasing slightly, Rhythm Pharmaceuticals shareholders should still consider the potential need for additional cash along the way. Companies can raise capital either through debt or equity. Many companies end up issuing new shares to fund their future growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
With a market capitalization of $430 million, Rhythm Pharmaceuticals’ cash burn of $135 million equates to approximately 31% of its market value. That’s a pretty notable cash burn, so if the company were to sell stock to cover another year’s cost of operations, shareholders would suffer costly dilution.
How risky is Rhythm Pharmaceuticals’ cash burn situation?
Even though its cash burn relative to its market capitalization makes us a bit nervous, we are bound to mention that we thought Rhythm Pharmaceuticals’ cash trail was relatively promising. Shareholders can rejoice that analysts predict it will break even. While we’re the kind of investors who are always a bit concerned about the risks of money-burning companies, the metrics we’ve discussed in this article leave us relatively comfortable about where Rhythm is. Pharmaceuticals. A thorough examination of the risks revealed 4 warning signs for Rhythm Pharmaceuticals readers should consider before committing capital to this title.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.