SELLAS Life Sciences Group (NASDAQ:SLS) Will Have To Spend Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. 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?

So, the natural question for SELLAS Life Sciences Group (NASDAQ:SLS) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for SELLAS Life Sciences Group

When Might SELLAS Life Sciences Group Run Out Of Money?

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 2024, SELLAS Life Sciences Group had cash of US$18m and no debt. In the last year, its cash burn was US$36m. Therefore, from March 2024 it had roughly 6 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

How Is SELLAS Life Sciences Group's Cash Burn Changing Over Time?

Because SELLAS Life Sciences Group isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 6.8%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can SELLAS Life Sciences Group Raise More Cash Easily?

While its cash burn is only increasing slightly, SELLAS Life Sciences Group shareholders should still consider the potential need for further cash, down the track. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

SELLAS Life Sciences Group's cash burn of US$36m is about 41% of its US$87m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

How Risky Is SELLAS Life Sciences Group's Cash Burn Situation?

We must admit that we don't think SELLAS Life Sciences Group is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its increasing cash burn acceptable, we can't ignore the fact that we consider its cash runway to be downright troublesome. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for SELLAS Life Sciences Group (3 can't be ignored!) that you should be aware of before investing here.

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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.

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