Sources of Information
How does one take the financial pulse of a company? Thankfully, there are readily available sources of information, and one need not have an MBA to understand them.
The key question regarding any money-burning company is: what is the state of the balance sheet and the rate of cash usage? In other words, how much cash does the company have, how much does it owe, and how much cash is the company burning per year?
For publicly traded companies, this information is readily available. Each company has an office of investor relations that will forward the companies’ quarterly reports and other public filings; alternatively, websites like Yahoo Finance and Google publish summaries of each company’s publicly disclosed numbers. Private companies, unfortunately, do not need to disclose the details of their financial condition. Prospective employees probably have maximal leverage to get this information by asking management directly during the recruitment phase.
Financial numbers are not difficult to understand. There are three financial statements that every publicly traded company needs to file and disclose four times a year: the balance sheet, income statement, and cash flow statement.
The balance sheet provides a snapshot-in-time view of the financial condition of the company. The left-hand column shows assets (things the company owns, including cash) while the right-hand column shows liabilities such as debts or services for which the company has been paid but has not yet delivered. The difference between the assets and liabilities represents the owners’ equity, the portion of the company’s assets that are not claimed by creditors.
The most important part of the balance sheet is the cash and equivalents part of the assets column. The cash-flow statement then summarizes cash outflows: from operating activities (day-to-day expenses from running the business), investing activities (one-time expenditures on big-ticket items plus interest expense minus interest earned), and financing activities (if the company sold stock or borrowed money).
Another simpler method for assessing the pulse of the company’s financial condition is to listen to the company’s quarterly conference call. Financial websites dedicate a page to every company, and the company page usually links to a webcast of the company conference call. Cash balances and cash burn are always explicitly addressed during these calls. Each conference call is split into two sections, a prepared statement and a Q&A portion during which Wall Street analysts and investors request clarifications and express concerns.
How does one interpret the numbers? A useful metric is the total of cash divided by the yearly cash burn. In other words, how long can the company continue to run its business without raising money?
A period in excess of two years should be enough to weather most down markets, as long as spending is not scheduled to increase significantly. Conversely, many experienced investors will not buy stock on the open market when there is less than a year or 18 months of cash on the balance sheet, since they know that a stock offering, at a discount to market, is coming. In these cases employees, or prospective employees, are certainly justified in directly asking management how they intend to fund the company as the money is running out: stock sales? Partnerships with pharmaceutical companies? Grants?
If management suggests that they plan to raise money by selling stock, recognize that there are limits to how much can be raised. Raising a sum greater than 20% of the company’s total market value requires shareholder approval in most cases, and managements’ in general. Try to avoid this drawn out and somewhat expensive process.
Five to ten minutes on a financial website plus 20 to 30 minutes invested in listening to the replay of a quarterly conference call provides a snapshot of a company’s financial strength. A biotechnology company’s financial condition is at least as important for its survival as the science and intellectual property upon which the company is based. In difficult markets, it is much more so. Knowing how to assess that financial condition is a critical part of navigating a career in biotechnology.