We're Not Worried About SK Biopharmaceuticals' (KRX:326030) Cash Burn

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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for SK Biopharmaceuticals (KRX:326030) 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for SK Biopharmaceuticals

How Long Is SK Biopharmaceuticals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When SK Biopharmaceuticals last reported its balance sheet in December 2020, it had zero debt and cash worth ₩388b. In the last year, its cash burn was ₩225b. So it had a cash runway of approximately 21 months from December 2020. Importantly, though, analysts think that SK Biopharmaceuticals will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

Is SK Biopharmaceuticals' Revenue Growing?

We don't yet have enough data to look at the trend in SK Biopharmaceuticals' cash burn, so operating revenue growth is arguably the best measure of growth we have, right now. Happily, its operating revenue increased by 314%, which is nice to see, just like a shooting star. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can SK Biopharmaceuticals Raise Cash?

There's no doubt SK Biopharmaceuticals' revenue growth is impressive but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

SK Biopharmaceuticals has a market capitalisation of ₩8.1t and burnt through ₩225b last year, which is 2.8% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About SK Biopharmaceuticals' Cash Burn?

As you can probably tell by now, we're not too worried about SK Biopharmaceuticals' cash burn. For example, we think its revenue growth suggests that the company is on a good path. And even though its cash runway wasn't quite as impressive, it was still a positive. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. An in-depth examination of risks revealed 1 warning sign for SK Biopharmaceuticals that readers should think about before committing capital to this stock.

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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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