Will TScan Therapeutics (NASDAQ:TCRX) Spend Its Cash Wisely?

By
Simply Wall St
Published
January 17, 2022
NasdaqGM:TCRX
Source: Shutterstock

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether TScan Therapeutics (NASDAQ:TCRX) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for TScan Therapeutics

When Might TScan Therapeutics Run Out Of Money?

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, TScan Therapeutics had cash of US$182m and no debt. Importantly, its cash burn was US$51m over the trailing twelve months. That means it had a cash runway of about 3.6 years as of September 2021. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqGM:TCRX Debt to Equity History January 17th 2022

How Well Is TScan Therapeutics Growing?

One thing for shareholders to keep front in mind is that TScan Therapeutics increased its cash burn by 471% in the last twelve months. But shareholders are no doubt taking some confidence from the rockstar revenue growth of 645% during that same year. Considering both these factors, we're not particularly excited by its growth profile. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can TScan Therapeutics Raise More Cash Easily?

There's no doubt TScan Therapeutics seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).

TScan Therapeutics' cash burn of US$51m is about 42% of its US$120m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About TScan Therapeutics' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought TScan Therapeutics' revenue growth was relatively promising. 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 TScan Therapeutics' situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for TScan Therapeutics (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course TScan 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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