Here's Why We're Watching Soleno Therapeutics' (NASDAQ:SLNO) Cash Burn Situation

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, Soleno Therapeutics (NASDAQ:SLNO) shareholders have done very well over the last year, with the share price soaring by 132%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for Soleno Therapeutics shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Soleno Therapeutics

How Long Is Soleno Therapeutics' 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. In June 2023, Soleno Therapeutics had US$19m in cash, and was debt-free. Looking at the last year, the company burnt through US$22m. So it had a cash runway of approximately 11 months from June 2023. Notably, analysts forecast that Soleno Therapeutics will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

How Is Soleno Therapeutics' Cash Burn Changing Over Time?

Because Soleno Therapeutics isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. It's possible that the 5.1% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. 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.

Can Soleno Therapeutics Raise More Cash Easily?

While Soleno Therapeutics is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Since it has a market capitalisation of US$45m, Soleno Therapeutics' US$22m in cash burn equates to about 49% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

How Risky Is Soleno Therapeutics' Cash Burn Situation?

On this analysis of Soleno Therapeutics' cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Taking a deeper dive, we've spotted 5 warning signs for Soleno Therapeutics you should be aware of, and 2 of them shouldn't be ignored.

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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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.