There's no doubt that money can be made by owning shares of unprofitable businesses.   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 IGM Biosciences (NASDAQ:IGMS) shareholders should be worried 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.  We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

When Might IGM Biosciences Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn.   In March 2024, IGM Biosciences had US$294m in cash, and was debt-free.   Importantly, its cash burn was US$195m over the trailing twelve months.   So it had a cash runway of approximately 18 months from March 2024.     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.

NasdaqGS:IGMS Debt to Equity History June 4th 2024

How Well Is IGM Biosciences Growing?

It was quite stunning to see that IGM Biosciences increased its cash burn by 568% over the last year.    But the silver lining is that operating revenue increased by 32% in that time.     Considering both these metrics, we're a little concerned about how the company is developing.    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.

Can IGM Biosciences Raise More Cash Easily?

While IGM Biosciences 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.    Generally speaking, a listed business can raise new cash through issuing shares or taking on debt.  Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of US$492m, IGM Biosciences' US$195m in cash burn equates to about 40% of its market value.    That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.  

Is IGM Biosciences' Cash Burn A Worry?

On this analysis of IGM Biosciences' cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried.      Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock.      Separately, we looked at different risks affecting the company and spotted 5 warning signs for IGM Biosciences (of which 1 makes us a bit uncomfortable!) you should know about.  

Of course IGM Biosciences 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.