Is SpringWorks Therapeutics (NASDAQ:SWTX) In A Good Position To Deliver On Growth Plans?
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 software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should SpringWorks Therapeutics (NASDAQ:SWTX) shareholders be worried about its 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.
See our latest analysis for SpringWorks Therapeutics
When Might SpringWorks Therapeutics Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When SpringWorks Therapeutics last reported its balance sheet in March 2022, it had zero debt and cash worth US$348m. Importantly, its cash burn was US$160m over the trailing twelve months. Therefore, from March 2022 it had 2.2 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Well Is SpringWorks Therapeutics Growing?
One thing for shareholders to keep front in mind is that SpringWorks Therapeutics increased its cash burn by 327% in the last twelve months. That's not ideal, but we're made even more nervous given that operating revenue was flat over the same period. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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.
How Hard Would It Be For SpringWorks Therapeutics To Raise More Cash For Growth?
While SpringWorks Therapeutics 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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$1.9b, SpringWorks Therapeutics' US$160m in cash burn equates to about 8.6% 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 SpringWorks Therapeutics' Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought SpringWorks Therapeutics' cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, SpringWorks Therapeutics has 3 warning signs (and 1 which is concerning) we think you should know about.
Of course SpringWorks Therapeutics 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.
