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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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Sprint Bioscience (STO:SPRINT) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Sprint Bioscience
How Long Is Sprint Bioscience's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2019, Sprint Bioscience had cash of kr4.4m and no debt. In the last year, its cash burn was kr48m. That means it had a cash runway of around 1 months as of June 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! Depicted below, you can see how its cash holdings have changed over time.
How Well Is Sprint Bioscience Growing?
Notably, Sprint Bioscience actually ramped up its cash burn very hard and fast in the last year, by 131%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 8.4%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Sprint Bioscience has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Sprint Bioscience To Raise More Cash For Growth?
Since Sprint Bioscience's revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, if need be. 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 to fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).