Even when a business is losing money, it's 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, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Sage Therapeutics (NASDAQ:SAGE) 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. Let's start with an examination of the business' cash, relative to its cash burn.
How Long Is Sage Therapeutics' Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2020, Sage Therapeutics had cash of US$757m and no debt. In the last year, its cash burn was US$504m. Therefore, from June 2020 it had roughly 18 months of cash runway. Notably, analysts forecast that Sage Therapeutics 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. You can see how its cash balance has changed over time in the image below.
How Well Is Sage Therapeutics Growing?
Some investors might find it troubling that Sage Therapeutics is actually increasing its cash burn, which is up 7.0% in the last year. Given that it boosted operating revenue by a stand-out 453% in the same period, we think management are simply more focussed on growth than preserving cash. Sometimes you need to spend money to make money! We think it is growing rather well, upon reflection. 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.
Can Sage Therapeutics Raise More Cash Easily?
Sage Therapeutics seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Sage Therapeutics' cash burn of US$504m is about 14% of its US$3.6b market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Sage Therapeutics' Cash Burn?
On this analysis of Sage Therapeutics' cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Sage Therapeutics that investors should know when investing in the stock.
Of course Sage Therapeutics 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.
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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