Trailing twelve-month data shows us that Synthorx, Inc.'s (NASDAQ:THOR) earnings loss has accumulated to -US$73.6m. Although some investors expected this, their belief in the path to profitability for Synthorx may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Selling new shares may dilute the value of existing shares on issue, and since Synthorx is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Synthorx’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
With a negative free cash flow of -US$36.8m, Synthorx is chipping away at its US$165m cash reserves in order to run its business. The riskiest factor facing investors of Synthorx is the potential for the company to run out of cash without the ability to raise more money. Furthermore, it is not uncommon to find loss-makers in an industry such as biotech. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Synthorx need to raise more cash?
One way to measure the cost to Synthorx of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Free cash outflows declined by 85% over the past year, which could be an indication of Synthorx putting the brakes on ramping up high growth. If Synthorx kept its cash burn rate at -US$36.8m, it may not need to raise capital for another couple of years. Even though this is analysis is fairly basic, and Synthorx still can cut its overhead further, or open a new line of credit instead of issuing new shares, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
The risks involved in investing in loss-making Synthorx means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The outcome of my analysis suggests that if the company maintains this negative rate of cash burn growth, it will run out of cash in the upcoming years. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Synthorx raise capital to fund its growth. I admit this is a fairly basic analysis for THOR's financial health. Other important fundamentals need to be considered as well. You should continue to research Synthorx to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for THOR’s future growth? Take a look at our free research report of analyst consensus for THOR’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Synthorx’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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