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 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for bluebird bio (NASDAQ:BLUE) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does bluebird bio Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When bluebird bio last reported its balance sheet in March 2021, it had zero debt and cash worth US$1.0b. In the last year, its cash burn was US$493m. That means it had a cash runway of about 2.1 years as of March 2021. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Well Is bluebird bio Growing?
We reckon the fact that bluebird bio managed to shrink its cash burn by 28% over the last year is rather encouraging. But this achievement is overshadowed by the brilliant operating revenue growth of 347%. We think it is growing rather well, upon reflection. 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 bluebird bio To Raise More Cash For Growth?
While bluebird bio seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
bluebird bio's cash burn of US$493m is about 27% of its US$1.8b 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 bluebird bio's Cash Burn Situation?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought bluebird bio's revenue growth 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. Taking an in-depth view of risks, we've identified 2 warning signs for bluebird bio that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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What are the risks and opportunities for bluebird bio?
Revenue is forecast to grow 44.98% per year
Has less than 1 year of cash runway
Shareholders have been diluted in the past year
Significant insider selling over the past 3 months
Volatile share price over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
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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