There's no doubt that money can be made by owning shares of unprofitable businesses. 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. 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 should Surface Oncology (NASDAQ:SURF) shareholders 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). Let's start with an examination of the business's cash, relative to its cash burn.
When Might Surface Oncology Run Out Of Money?
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. When Surface Oncology last reported its balance sheet in June 2019, it had zero debt and cash worth US$126m. In the last year, its cash burn was US$61m. That means it had a cash runway of about 2.1 years as of June 2019. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Surface Oncology Growing?
One thing for shareholders to keep front in mind is that Surface Oncology increased its cash burn by 396% in the last twelve months. That's pretty alarming given that operating revenue dropped 51% over the last year, though the business is likely attempting a strategic pivot. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Surface Oncology Raise Cash?
Surface Oncology revenue is declining and its cash burn is increasing, so many may be considering its need 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 to drive 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.
Surface Oncology has a market capitalisation of US$54m and burnt through US$61m last year, which is 114% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
So, Should We Worry About Surface Oncology's Cash Burn?
On this analysis of Surface Oncology's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Surface Oncology CEO is paid..
Of course Surface Oncology may not be the best stock to buy. So you may wish to see this freecollection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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