We're Hopeful That Sage Therapeutics (NASDAQ:SAGE) Will Use Its Cash Wisely

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Sage Therapeutics (NASDAQ:SAGE) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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 Sage Therapeutics

Does Sage Therapeutics Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2022, Sage Therapeutics had US$1.6b in cash, and was debt-free. Looking at the last year, the company burnt through US$377m. That means it had a cash runway of about 4.3 years as of March 2022. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

Is Sage Therapeutics' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Sage Therapeutics actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The bad news for shareholders is that operating revenue actually plummeted 99% in the last year, which is a real concern in our view. 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.

Can Sage Therapeutics Raise More Cash Easily?

Given its problematic fall in revenue, Sage Therapeutics shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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.

Sage Therapeutics has a market capitalisation of US$1.9b and burnt through US$377m last year, which is 20% of the company's market value. 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.

Is Sage Therapeutics' Cash Burn A Worry?

On this analysis of Sage Therapeutics' cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. 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 Sage Therapeutics' situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Sage Therapeutics that potential shareholders should take into account before putting money into a stock.

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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.