There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Shattuck Labs (NASDAQ:STTK) 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.
Does Shattuck Labs 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 2020, Shattuck Labs had cash of US$135m and no debt. Looking at the last year, the company burnt through US$28m. That means it had a cash runway of about 4.9 years as of September 2020. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Well Is Shattuck Labs Growing?
Shattuck Labs actually ramped up its cash burn by a whopping 53% in the last year, which shows it is boosting investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 15% in the same time frame. In light of the data above, we're fairly sanguine about the business growth trajectory. 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.
Can Shattuck Labs Raise More Cash Easily?
We are certainly impressed with the progress Shattuck Labs has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Shattuck Labs' cash burn of US$28m is about 1.6% of its US$1.8b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Shattuck Labs' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Shattuck Labs' cash burn. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Shattuck Labs has 2 warning signs (and 1 which is concerning) we think you should know about.
Of course Shattuck Labs 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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