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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Sage Therapeutics (NASDAQ:SAGE) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Sage Therapeutics Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Sage Therapeutics last reported its balance sheet in June 2019, it had zero debt and cash worth US$1.2b. Importantly, its cash burn was US$470m over the trailing twelve months. So it had a cash runway of about 2.6 years from June 2019. Importantly, analysts think that Sage Therapeutics will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Sage Therapeutics Growing?
Notably, Sage Therapeutics actually ramped up its cash burn very hard and fast in the last year, by 153%, signifying heavy investment in the business. That's bad enough, but the operating revenue drop of 98% points to a period of uncertainty and, quite potentially, heightened risk for holders." Considering these two factors together makes us nervous about the direction the company seems to be heading. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Sage Therapeutics Raise Cash?
Since Sage Therapeutics can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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$8.5b, Sage Therapeutics's US$470m in cash burn equates to about 5.6% of its 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.
How Risky Is Sage Therapeutics's Cash Burn Situation?
On this analysis of Sage Therapeutics's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Sage Therapeutics's situation. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Sage Therapeutics's CEO gets paid each year.
Of course Sage Therapeutics 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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