NGM Biopharmaceuticals (NASDAQ:NGM) Is In A Good Position To Deliver On Growth Plans

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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for NGM Biopharmaceuticals (NASDAQ:NGM) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for NGM Biopharmaceuticals

When Might NGM Biopharmaceuticals Run Out Of Money?

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 2020, NGM Biopharmaceuticals had US$328m in cash, and was debt-free. Importantly, its cash burn was US$50m over the trailing twelve months. So it had a cash runway of about 6.5 years from March 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is NGM Biopharmaceuticals Growing?

Notably, NGM Biopharmaceuticals actually ramped up its cash burn very hard and fast in the last year, by 131%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 11%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. While the past is always worth studying, it is the future that matters most of all. 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 NGM Biopharmaceuticals To Raise More Cash For Growth?

While NGM Biopharmaceuticals seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

NGM Biopharmaceuticals has a market capitalisation of US$1.3b and burnt through US$50m last year, which is 3.9% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About NGM Biopharmaceuticals' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought NGM Biopharmaceuticals' cash runway was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, NGM Biopharmaceuticals has 3 warning signs (and 1 which can't be ignored) we think you should know about.

Of course NGM Biopharmaceuticals 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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