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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Soleno Therapeutics (NASDAQ:SLNO) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Soleno Therapeutics’s Cash Runway?
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 2019, Soleno Therapeutics had cash of US$16m and no debt. Looking at the last year, the company burnt through US$14m. So it had a cash runway of approximately 14 months from June 2019. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
How Is Soleno Therapeutics’s Cash Burn Changing Over Time?
Soleno Therapeutics didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 40%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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 Hard Would It Be For Soleno Therapeutics To Raise More Cash For Growth?
Given its cash burn trajectory, Soleno Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 to drive growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
Soleno Therapeutics’s cash burn of US$14m is about 29% of its US$48m market capitalisation. That’s fairly notable cash burn, so if the company had to sell shares to cover the cost of another year’s operations, shareholders would suffer some costly dilution.
How Risky Is Soleno Therapeutics’s Cash Burn Situation?
On this analysis of Soleno Therapeutics’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Soleno Therapeutics’s cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that Soleno Therapeutics insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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