We can readily understand why investors are attracted to unprofitable companies. Indeed, Spero Therapeutics (NASDAQ:SPRO) stock is up 109% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky Spero Therapeutics' cash burn is. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Spero Therapeutics Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Spero Therapeutics last reported its balance sheet in June 2021, it had zero debt and cash worth US$99m. Importantly, its cash burn was US$70m over the trailing twelve months. That means it had a cash runway of around 17 months as of June 2021. Notably, analysts forecast that Spero Therapeutics will break even (at a free cash flow level) in about 3 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 Spero Therapeutics Growing?
Spero Therapeutics reduced its cash burn by 7.6% during the last year, which points to some degree of discipline. Having said that, the revenue growth of 57% was considerably more inspiring. It seems to be growing nicely. 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 Spero Therapeutics Raise More Cash Easily?
Spero 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. 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. 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.
Since it has a market capitalisation of US$626m, Spero Therapeutics' US$70m in cash burn equates to about 11% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is Spero Therapeutics' Cash Burn Situation?
Spero Therapeutics appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong revenue growth. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Spero Therapeutics (of which 1 shouldn't be ignored!) you should know about.
Of course Spero 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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