Is Sol-Gel Technologies (NASDAQ:SLGL) In A Good Position To Invest In Growth?
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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Sol-Gel Technologies (NASDAQ:SLGL) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Sol-Gel Technologies
When Might Sol-Gel Technologies 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. As at June 2023, Sol-Gel Technologies had cash of US$47m and no debt. Looking at the last year, the company burnt through US$11m. Therefore, from June 2023 it had 4.1 years of cash runway. Notably, however, analysts think that Sol-Gel Technologies will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Sol-Gel Technologies Growing?
It was quite stunning to see that Sol-Gel Technologies increased its cash burn by 274% over the last year. That's bad enough, but the operating revenue drop of 96% points to a period of uncertainty and, quite potentially, heightened risk for holders." In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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 Easily Can Sol-Gel Technologies Raise Cash?
While Sol-Gel Technologies seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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 has a market capitalisation of US$37m and burnt through US$11m last year, which is 31% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Sol-Gel Technologies' Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Sol-Gel Technologies' cash runway was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. Summing up, we think the Sol-Gel Technologies' cash burn is a risk, based on the factors we mentioned in this article. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 5 warning signs for Sol-Gel Technologies that potential shareholders should take into account before putting money into a stock.
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.
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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.
