Here's Why We're Watching Sangamo Therapeutics' (NASDAQ:SGMO) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Sangamo Therapeutics (NASDAQ:SGMO) shareholders should be worried about its 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.

See our latest analysis for Sangamo Therapeutics

When Might Sangamo Therapeutics Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Sangamo Therapeutics had cash of US$316m and no debt. Looking at the last year, the company burnt through US$241m. So it had a cash runway of approximately 16 months from June 2022. Importantly, analysts think that Sangamo Therapeutics will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Well Is Sangamo Therapeutics Growing?

Notably, Sangamo Therapeutics actually ramped up its cash burn very hard and fast in the last year, by 109%, signifying heavy investment in the business. While that's concerning on it's own, the fact that operating revenue was actually down 17% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. 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 Sangamo Therapeutics Raise Cash?

Sangamo Therapeutics revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. 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. 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.

Sangamo Therapeutics has a market capitalisation of US$822m and burnt through US$241m last year, which is 29% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Sangamo Therapeutics' Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Sangamo Therapeutics' cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Summing up, we think the Sangamo Therapeutics' cash burn is a risk, based on the factors we mentioned in this article. An in-depth examination of risks revealed 2 warning signs for Sangamo Therapeutics 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. 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.