There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Zymeworks (NASDAQ:ZYME) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

How Long Is Zymeworks' Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2023, Zymeworks had cash of US$374m and no debt. In the last year, its cash burn was US$122m. That means it had a cash runway of about 3.1 years as of December 2023. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

Is Zymeworks' Revenue Growing?

Given that Zymeworks actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The bad news for shareholders is that operating revenue actually plummeted 82% in the last year, which is a real concern in our view. 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.

Can Zymeworks Raise More Cash Easily?

Given its problematic fall in revenue, Zymeworks shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).

Zymeworks has a market capitalisation of US$635m and burnt through US$122m last year, which is 19% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Zymeworks' Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Zymeworks' cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Zymeworks' situation. An in-depth examination of risks revealed 2 warning signs for Zymeworks that readers should think about before committing capital to this stock.

Of course Zymeworks 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.

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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.