We're Interested To See How Wave Life Sciences (NASDAQ:WVE) Uses Its Cash Hoard To Grow

We can readily understand why investors are attracted to unprofitable companies. 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.

So should Wave Life Sciences (NASDAQ:WVE) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Wave Life Sciences

When Might Wave Life Sciences Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2023, Wave Life Sciences had cash of US$173m and no debt. Importantly, its cash burn was US$12m over the trailing twelve months. That means it had a cash runway of very many years as of June 2023. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Wave Life Sciences Growing?

Given our focus on Wave Life Sciences' cash burn, we're delighted to see that it reduced its cash burn by a nifty 89%. But it was a bit disconcerting to see operating revenue down 9.3% in that time. It seems to be growing nicely. 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.

How Easily Can Wave Life Sciences Raise Cash?

There's no doubt Wave Life Sciences 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Wave Life Sciences' cash burn of US$12m is about 2.6% of its US$465m market capitalisation. 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 Wave Life Sciences' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Wave Life Sciences is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. While its falling revenue 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. Taking a deeper dive, we've spotted 4 warning signs for Wave Life Sciences you should be aware of, and 1 of them doesn't sit too well with us.

Of course Wave Life Sciences 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.