Companies Like Schrödinger (NASDAQ:SDGR) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Schrödinger (NASDAQ:SDGR) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Schrödinger

How Long Is Schrödinger's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Schrödinger last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth US$389m. Looking at the last year, the company burnt through US$172m. That means it had a cash runway of about 2.3 years as of September 2024. Notably, analysts forecast that Schrödinger will break even (at a free cash flow level) in about 5 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Schrödinger Growing?

Some investors might find it troubling that Schrödinger is actually increasing its cash burn, which is up 26% in the last year. And we must say we find it concerning that operating revenue dropped 3.0% over the same period. Considering both these factors, we're not particularly excited by its growth profile. 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 Schrödinger Raise Cash?

Schrödinger seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Schrödinger has a market capitalisation of US$1.5b and burnt through US$172m last year, which is 11% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Schrödinger's Cash Burn?

On this analysis of Schrödinger's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Schrödinger's situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Schrödinger that investors should know when investing in the stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.