Trailing twelve-month data shows us that Seres Therapeutics, Inc.'s (NASDAQ:MCRB) earnings loss has accumulated to -US$78.3m. Although some investors expected this, their belief in the path to profitability for Seres Therapeutics may be wavering. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. 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. Today I’ve examined Seres Therapeutics’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$55.5m, Seres Therapeutics is chipping away at its US$102m 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 companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Seres Therapeutics 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 Seres Therapeutics has to spend each year in order to keep its business running.
In Seres Therapeutics’s case, its cash outflows fell by 44% last year, which may signal the company moving towards a more sustainable level of expenses. Though, if the company kept its cash burn level at -US$55.5m, it may not need to raise capital for another 1.8 years. Even though this is analysis is fairly basic, and Seres Therapeutics still can cut its overhead further, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Seres Therapeutics operation is, and when things may have to change.
This analysis isn’t meant to deter you from Seres Therapeutics, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. The potential equity raising resulting from this means you might get a better deal on the share price if the company the company raises capital again. I admit this is a fairly basic analysis for MCRB's financial health. Other important fundamentals need to be considered as well. I recommend you continue to research Seres Therapeutics to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MCRB’s future growth? Take a look at our free research report of analyst consensus for MCRB’s outlook.
- Valuation: What is MCRB worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MCRB is currently mispriced by the market.
- 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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