We're Keeping An Eye On Stoke Therapeutics' (NASDAQ:STOK) 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.

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'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Stoke Therapeutics

When Might Stoke Therapeutics Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Stoke Therapeutics last reported its March 2024 balance sheet in May 2024, it had zero debt and cash worth US$179m. In the last year, its cash burn was US$86m. That means it had a cash runway of about 2.1 years as of March 2024. Notably, analysts forecast that Stoke 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Stoke Therapeutics Growing?

On balance, we think it's mildly positive that Stoke Therapeutics trimmed its cash burn by 3.7% over the last twelve months. But the revenue dip of 46% in the same period was a bit concerning. Considering both these metrics, we're a little concerned about how the company is developing. 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.

How Hard Would It Be For Stoke Therapeutics To Raise More Cash For Growth?

Even though it seems like Stoke Therapeutics is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Since it has a market capitalisation of US$708m, Stoke Therapeutics' US$86m in cash burn equates to about 12% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Stoke Therapeutics' Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Stoke Therapeutics' cash runway was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Stoke Therapeutics' situation. An in-depth examination of risks revealed 3 warning signs for Stoke Therapeutics that readers should think about before committing capital to this stock.

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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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