Sol-Gel Technologies (NASDAQ:SLGL) Is In A Good Position To Deliver On Growth Plans
There's no doubt that money can be made by owning shares of unprofitable businesses. 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.
So, the natural question for Sol-Gel Technologies (NASDAQ:SLGL) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Sol-Gel Technologies
When Might Sol-Gel Technologies Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Sol-Gel Technologies had US$50m in cash, and was debt-free. In the last year, its cash burn was US$26m. That means it had a cash runway of around 23 months as of December 2020. Notably, analysts forecast that Sol-Gel Technologies will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Sol-Gel Technologies Growing?
Some investors might find it troubling that Sol-Gel Technologies is actually increasing its cash burn, which is up 11% in the last year. The fact that operating revenue was down 62% only gives us further disquiet. Taken together, we think these growth metrics are a little worrying. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Sol-Gel Technologies Raise More Cash Easily?
Sol-Gel Technologies seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Sol-Gel Technologies' cash burn of US$26m is about 8.9% of its US$288m market capitalisation. 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.
Is Sol-Gel Technologies' Cash Burn A Worry?
On this analysis of Sol-Gel Technologies' cash burn, we think its cash burn relative to its market cap 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 Sol-Gel Technologies' situation. Taking a deeper dive, we've spotted 4 warning signs for Sol-Gel Technologies you should be aware of, and 1 of them is a bit concerning.
Of course Sol-Gel Technologies may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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. 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.
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