Here's Why We're A Bit Worried About Freeline Therapeutics Holdings' (NASDAQ:FRLN) Cash Burn Situation
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Freeline Therapeutics Holdings (NASDAQ:FRLN) shareholders should be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Freeline Therapeutics Holdings
When Might Freeline Therapeutics Holdings 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 Freeline Therapeutics Holdings last reported its balance sheet in June 2023, it had zero debt and cash worth US$39m. Looking at the last year, the company burnt through US$77m. Therefore, from June 2023 it had roughly 6 months of cash runway. Importantly, analysts think that Freeline Therapeutics Holdings will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Freeline Therapeutics Holdings' Cash Burn Changing Over Time?
Whilst it's great to see that Freeline Therapeutics Holdings has already begun generating revenue from operations, last year it only produced US$617k, 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. As it happens, the company's cash burn reduced by 9.6% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. 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 Freeline Therapeutics Holdings To Raise More Cash For Growth?
While Freeline Therapeutics Holdings is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Freeline Therapeutics Holdings has a market capitalisation of US$21m and burnt through US$77m last year, which is 362% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is Freeline Therapeutics Holdings' Cash Burn A Worry?
As you can probably tell by now, we're rather concerned about Freeline Therapeutics Holdings' cash burn. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. And although we accept its cash burn reduction wasn't as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. One real positive is that analysts are forecasting that the company will reach breakeven. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. On another note, Freeline Therapeutics Holdings has 5 warning signs (and 3 which are potentially serious) we think you should know about.
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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.
