Here's Why We're A Bit Worried About Spectrum Pharmaceuticals' (NASDAQ:SPPI) 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, 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Spectrum Pharmaceuticals (NASDAQ:SPPI) shareholders 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.

View our latest analysis for Spectrum Pharmaceuticals

How Long Is Spectrum Pharmaceuticals' 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. In March 2022, Spectrum Pharmaceuticals had US$89m in cash, and was debt-free. Looking at the last year, the company burnt through US$115m. So it had a cash runway of approximately 9 months from March 2022. Importantly, analysts think that Spectrum Pharmaceuticals will reach cashflow breakeven in 2 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 Is Spectrum Pharmaceuticals' Cash Burn Changing Over Time?

Because Spectrum Pharmaceuticals 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. As it happens, the company's cash burn reduced by 9.1% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. 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 Spectrum Pharmaceuticals Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Spectrum Pharmaceuticals to raise more cash in the future. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of US$145m, Spectrum Pharmaceuticals' US$115m in cash burn equates to about 80% of its market value. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

How Risky Is Spectrum Pharmaceuticals' Cash Burn Situation?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Spectrum Pharmaceuticals' cash burn reduction was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Taking a deeper dive, we've spotted 4 warning signs for Spectrum Pharmaceuticals 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.