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Here's Why We're Watching CytomX Therapeutics's (NASDAQ:CTMX) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

So should CytomX Therapeutics (NASDAQ:CTMX) shareholders be worried about its cash burn? 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for CytomX Therapeutics

When Might CytomX Therapeutics 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, CytomX Therapeutics had US$248m in cash, and was debt-free. Looking at the last year, the company burnt through US$154m. So it had a cash runway of approximately 19 months from March 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

NasdaqGS:CTMX Debt to Equity History July 10th 2020
NasdaqGS:CTMX Debt to Equity History July 10th 2020

How Well Is CytomX Therapeutics Growing?

Some investors might find it troubling that CytomX Therapeutics is actually increasing its cash burn, which is up 47% in the last year. At least the revenue was up 3.7% during the period, even if it wasn't up by much. In light of the data above, we're fairly sanguine about the business growth trajectory. 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.

How Easily Can CytomX Therapeutics Raise Cash?

Even though it seems like CytomX Therapeutics is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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).

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CytomX Therapeutics's cash burn of US$154m is about 40% of its US$382m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About CytomX Therapeutics's Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought CytomX Therapeutics's cash runway was relatively promising. Summing up, we think the CytomX Therapeutics's cash burn is a risk, based on the factors we mentioned in this article. On another note, CytomX Therapeutics has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

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