Even when a business is losing money, its possible for shareholders to make money if they buy a good business at the right price. 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, youd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Unity Biotechnology (NASDAQ:UBX) 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. Well start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Unity Biotechnology

A companys cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. Unity Biotechnology has such a small amount of debt that well set it aside, and focus on the US$113m in cash it held at September 2019. Importantly, its cash burn was US$71m over the trailing twelve months. That means it had a cash runway of around 19 months as of September 2019. While that cash runway isnt too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

Some investors might find it troubling that Unity Biotechnology is actually increasing its cash burn, which is up 25% in the last year. In light of that, the flat year on year operating leverage is a bit off-putting. In light of the data above, were fairly sanguine about the business growth trajectory. 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.

Unity Biotechnology seems to be in a fairly good position, in terms of cash burn, but we still think its worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. We can compare a companys cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one years operations.

Unity Biotechnologys cash burn of US$71m is about 21% of its US$334m market capitalisation. Thats not insignificant, and if the company had to sell enough shares to fund another years growth at the current share price, youd likely witness fairly costly dilution.

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Unity Biotechnologys cash runway was relatively promising. Even though we dont think it has a problem with its cash burn, the analysis weve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. For us, its always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Unity Biotechnology CEO receives in total remuneration.

Of course Unity Biotechnology 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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We Think Unity Biotechnology (NASDAQ:UBX) Needs To Drive Business Growth Carefully - Simply Wall St