Companies Like Stoke Therapeutics (NASDAQ:STOK) Can Afford To Invest In Growth

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Stoke Therapeutics (NASDAQ:STOK) shareholders 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 Stoke Therapeutics

When Might Stoke Therapeutics Run Out Of Money?

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. As at June 2022, Stoke Therapeutics had cash of US$276m and no debt. Looking at the last year, the company burnt through US$20m. That means it had a cash runway of very many years as of June 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Is Stoke Therapeutics' Cash Burn Changing Over Time?

Whilst it's great to see that Stoke Therapeutics has already begun generating revenue from operations, last year it only produced US$6.2m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Notably, its cash burn was actually down by 65% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. 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 Stoke Therapeutics Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of Stoke Therapeutics' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. 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. 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.

Stoke Therapeutics has a market capitalisation of US$851m and burnt through US$20m last year, which is 2.4% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is Stoke Therapeutics' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Stoke Therapeutics' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking a deeper dive, we've spotted 4 warning signs for Stoke Therapeutics you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course Stoke Therapeutics 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.