We Think Sol-Gel Technologies (NASDAQ:SLGL) Needs To Drive Business Growth Carefully

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Sol-Gel Technologies (NASDAQ:SLGL) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Sol-Gel Technologies

Does Sol-Gel Technologies Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Sol-Gel Technologies last reported its balance sheet in March 2021, it had zero debt and cash worth US$47m. Looking at the last year, the company burnt through US$26m. So it had a cash runway of approximately 22 months from March 2021. Notably, analysts forecast that Sol-Gel Technologies will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Well Is Sol-Gel Technologies Growing?

Some investors might find it troubling that Sol-Gel Technologies is actually increasing its cash burn, which is up 19% in the last year. It's even more troubling to see that operating revenue fell 70% during the period. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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 Hard Would It Be For Sol-Gel Technologies To Raise More Cash For Growth?

Since Sol-Gel Technologies can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. 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).

Sol-Gel Technologies' cash burn of US$26m is about 10% of its US$246m market capitalisation. 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.

How Risky Is Sol-Gel Technologies' Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Sol-Gel Technologies' cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it 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 Sol-Gel Technologies' 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 Sol-Gel Technologies that investors should know when investing in the stock.

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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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