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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for SpringWorks Therapeutics (NASDAQ:SWTX) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
When Might SpringWorks Therapeutics Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2021, SpringWorks Therapeutics had cash of US$477m and no debt. Importantly, its cash burn was US$37m over the trailing twelve months. That means it had a cash runway of very many years as of March 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
How Is SpringWorks Therapeutics’ Cash Burn Changing Over Time?
Whilst it’s great to see that SpringWorks Therapeutics has already begun generating revenue from operations, last year it only produced US$35m, so we don’t think it is generating significant revenue, at this point. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 35% over the last year suggests some degree of prudence. 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 SpringWorks Therapeutics Raise More Cash Easily?
While SpringWorks Therapeutics is showing a solid reduction in its cash burn, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. 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 and fund growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
SpringWorks Therapeutics’ cash burn of US$37m is about 0.9% of its US$4.1b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is SpringWorks Therapeutics’ Cash Burn A Worry?
It may already be apparent to you that we’re relatively comfortable with the way SpringWorks Therapeutics is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even though its cash burn reduction wasn’t quite as impressive, it was still a positive. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, SpringWorks Therapeutics has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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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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