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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So, the natural question for Sio Gene Therapies (NASDAQ:SIOX) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Sio Gene Therapies' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Sio Gene Therapies last reported its balance sheet in December 2020, it had zero debt and cash worth US$89m. In the last year, its cash burn was US$55m. That means it had a cash runway of around 20 months as of December 2020. Notably, analysts forecast that Sio Gene Therapies will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Sio Gene Therapies' Cash Burn Changing Over Time?
Because Sio Gene Therapies isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn dropping by 11% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. 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.
How Hard Would It Be For Sio Gene Therapies To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Sio Gene Therapies to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Sio Gene Therapies has a market capitalisation of US$122m and burnt through US$55m last year, which is 45% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.
How Risky Is Sio Gene Therapies' Cash Burn Situation?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Sio Gene Therapies' cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, Sio Gene Therapies has 4 warning signs (and 2 which can't be ignored) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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. 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.
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