Every trader should be familiar with the term cash burn rate. It is a way traders can judge if an offering might be eminent. In layman’s terms it means how long can your company operate until you run out of money. Bio Pharma stocks usually have a higher cash burn rate than say technology company as it is very expensive to conduct trials of new drugs in hopes of getting FDA approval.
Calculating the cash burn rate does not seem like a complicated process. Look at an earnings statement and take the difference of the prior quarters cash balance. Lets say that last quarter the company had a $100,000 cash balance and this quarter it has $40,000. That means there was a 60,000 cash burn for the quarter which equals about $20,000 burn rate per month. At that rate the company has 2 months of cash remaining. If a company did an offering during that quarter the cash will be higher than the previous quarter so keep that in mind.
There are two types of burn rates. One is gross burn rate which refers to a companies total cost. The second type is net burn rate and it refers to total costs minus revenues. When you hear “burn rate,” you should assume it is net burn rate unless the person specifies otherwise.
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