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Should You Sell Entasis Therapeutics Holdings Inc. (NASDAQ:ETTX) For This Reason?

Simply Wall St

Trailing twelve-month data shows us that Entasis Therapeutics Holdings Inc.'s (NASDAQ:ETTX) earnings loss has accumulated to -US$52.0m. Although some investors expected this, their belief in the path to profitability for Entasis Therapeutics Holdings may be wavering. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Looking at Entasis Therapeutics Holdings’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.

See our latest analysis for Entasis Therapeutics Holdings

What is cash burn?

With a negative free cash flow of -US$42.8m, Entasis Therapeutics Holdings is chipping away at its US$59m cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Not surprisingly, it is more common to find unprofitable companies in the high-growth biotech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

NasdaqGM:ETTX Income Statement, September 19th 2019

When will Entasis Therapeutics Holdings need to raise more cash?

When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Entasis Therapeutics Holdings has to spend each year in order to keep its business running.

Free cash outflows declined by 28% over the past year, which could be an indication of Entasis Therapeutics Holdings putting the brakes on ramping up high growth. But, if the company maintains its cash burn at the current level of -US$42.8m, it may still need additional capital within the next 1.4 years. Even though this is analysis is fairly basic, and Entasis Therapeutics Holdings still can cut its overhead further, or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the Entasis Therapeutics Holdings operation is, and when things may have to change.

Next Steps:

Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that even if the company was to continue to shrink its cash burn at its current rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Entasis Therapeutics Holdings raise capital to fund its growth. This is only a rough assessment of financial health, and ETTX likely also has company-specific issues impacting its cash management decisions. I suggest you continue to research Entasis Therapeutics Holdings to get a more holistic view of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ETTX’s future growth? Take a look at our free research report of analyst consensus for ETTX’s outlook.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Entasis Therapeutics Holdings’s board and the CEO’s back ground.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.