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, Fate Therapeutics (NASDAQ:FATE) shareholders have done very well over the last year, with the share price soaring by 128%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So notwithstanding the buoyant share price, we think it's well worth asking whether Fate Therapeutics' cash burn is too risky. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Fate Therapeutics 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. As at March 2021, Fate Therapeutics had cash of US$790m and no debt. In the last year, its cash burn was US$47m. So it had a very long cash runway of many years from March 2021. Importantly, though, analysts think that Fate Therapeutics will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Fate Therapeutics Growing?
We reckon the fact that Fate Therapeutics managed to shrink its cash burn by 52% over the last year is rather encouraging. But it was the operating revenue growth of 279% that really shone. Considering these factors, we're fairly impressed by its growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Fate Therapeutics To Raise More Cash For Growth?
There's no doubt Fate Therapeutics seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. 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 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.
Fate Therapeutics' cash burn of US$47m is about 0.6% of its US$7.4b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Fate Therapeutics' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Fate Therapeutics' cash burn. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Fate Therapeutics that investors should know when investing in the stock.
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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