We can easily understand why investors are attracted to unprofitable companies. For example, although Salesforce.com’s software-as-a-service business lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we’d take a look at whether personalist (NASDAQ:PSNL) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.

See our latest analysis for Personalis

Does Personalist 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. When Personalis last reported its balance sheet in March 2023, it had zero debt and cash worth US$149m. In the last year, its cash burn was US$120m. That means it had a cash runway of around 15 months as of March 2023. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis

debt-equity-history-analysis

How Well Is Personalist Growing?

At first glance it’s a bit worrying to see that Personalis actually boosted its cash burn by 33%, year on year. Also concerning, operating revenue was actually down by 14% at that time. 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. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Personalis Raise Cash?

Since Personalis can’t yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. 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 roughly estimate how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalization of US$108m, Personalis’ US$120m in cash burn equates to about 111% of its market value. That suggests the company may have some funding difficulties, and we’d be very wary of the stock.

So, Should We Worry About Personalis’ Cash Burn?

On this analysis of Personalis’ cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Considering all the measures mentioned in this report, we recognize that its cash burn is fairly risky, and if we hold shares we’d be watching like a hawk for any deterioration. Readers need to have a sound understanding of business risks before investing in a stock, and we’ve spotted 3 warning signs for Personalist that potential shareholders should take into account before putting money into a stock.

Of course Personalis may not be the best stock to buy. So you may wish to see this free a collection of companies boasting high returns on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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