Companies Like SELLAS Life Sciences Group (NASDAQ:SLS) Are In A Position To Invest In Growth
We can readily understand why investors are attracted to unprofitable companies. For example, SELLAS Life Sciences Group (NASDAQ:SLS) shareholders have done very well over the last year, with the share price soaring by 303%. 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 notwithstanding the buoyant share price, we think it's well worth asking whether SELLAS Life Sciences Group's cash burn is too risky. 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.
See our latest analysis for SELLAS Life Sciences Group
How Long Is SELLAS Life Sciences Group's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2021, SELLAS Life Sciences Group had US$28m in cash, and was debt-free. Importantly, its cash burn was US$14m over the trailing twelve months. So it had a cash runway of about 2.0 years from March 2021. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Is SELLAS Life Sciences Group's Cash Burn Changing Over Time?
Whilst it's great to see that SELLAS Life Sciences Group has already begun generating revenue from operations, last year it only produced US$7.6m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Even though it doesn't get us excited, the 29% reduction in cash burn year on year does suggest the company can continue operating for quite some time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For SELLAS Life Sciences Group 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 SELLAS Life Sciences Group to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).
SELLAS Life Sciences Group has a market capitalisation of US$202m and burnt through US$14m last year, which is 6.8% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About SELLAS Life Sciences Group's Cash Burn?
As you can probably tell by now, we're not too worried about SELLAS Life Sciences Group's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash burn reduction wasn't quite as good, but was still rather encouraging! Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for SELLAS Life Sciences Group (1 is significant!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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