We're A Little Worried About Sonnet BioTherapeutics Holdings' (NASDAQ:SONN) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Sonnet BioTherapeutics Holdings (NASDAQ:SONN) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Sonnet BioTherapeutics Holdings

Does Sonnet BioTherapeutics Holdings Have A Long Cash Runway?

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 September 2021, Sonnet BioTherapeutics Holdings had cash of US$28m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$23m over the trailing twelve months. So it had a cash runway of approximately 15 months from September 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Is Sonnet BioTherapeutics Holdings' Cash Burn Changing Over Time?

Whilst it's great to see that Sonnet BioTherapeutics Holdings has already begun generating revenue from operations, last year it only produced US$484k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With the cash burn rate up 44% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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.

How Hard Would It Be For Sonnet BioTherapeutics Holdings To Raise More Cash For Growth?

While Sonnet BioTherapeutics Holdings does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Sonnet BioTherapeutics Holdings has a market capitalisation of US$27m and burnt through US$23m last year, which is 83% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

So, Should We Worry About Sonnet BioTherapeutics Holdings' Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Sonnet BioTherapeutics Holdings' cash runway was relatively promising. 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. Separately, we looked at different risks affecting the company and spotted 7 warning signs for Sonnet BioTherapeutics Holdings (of which 4 don't sit too well with us!) you should know about.

Of course Sonnet BioTherapeutics Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.