We Think SQZ Biotechnologies (NYSE:SQZ) Needs To Drive Business Growth Carefully

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, 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. 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, the natural question for SQZ Biotechnologies (NYSE:SQZ) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for SQZ Biotechnologies

Does SQZ Biotechnologies Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2022, SQZ Biotechnologies had cash of US$84m and no debt. In the last year, its cash burn was US$84m. So it had a cash runway of approximately 12 months from September 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Well Is SQZ Biotechnologies Growing?

At first glance it's a bit worrying to see that SQZ Biotechnologies actually boosted its cash burn by 3.9%, year on year. The silver lining is that revenue was up 27%, showing the business is growing at the top line. On balance, we'd say the company is improving over time. 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 SQZ Biotechnologies To Raise More Cash For Growth?

While SQZ Biotechnologies seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster 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 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).

SQZ Biotechnologies' cash burn of US$84m is about 355% of its US$24m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is SQZ Biotechnologies' Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought SQZ Biotechnologies' revenue growth was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, SQZ Biotechnologies has 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course SQZ Biotechnologies 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.