Yahoo Finance We're A Little Worried About Sol-Gel Technologies' (NASDAQ:SLGL) Cash Burn Rate
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 should Sol-Gel Technologies (NASDAQ:SLGL) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Sol-Gel Technologies
How Long Is Sol-Gel Technologies' Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Sol-Gel Technologies last reported its March 2024 balance sheet in May 2024, it had zero debt and cash worth US$33m. In the last year, its cash burn was US$18m. That means it had a cash runway of around 22 months as of March 2024. Importantly, analysts think that Sol-Gel Technologies will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Sol-Gel Technologies Growing?
Sol-Gel Technologies actually ramped up its cash burn by a whopping 69% in the last year, which shows it is boosting investment in the business. And that is all the more of a concern in light of the fact that operating revenue was actually down by 63% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. While the past is always worth studying, it is the future that matters most of all. 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 Sol-Gel Technologies Raise Cash?
Since Sol-Gel Technologies can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. 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).
Sol-Gel Technologies' cash burn of US$18m is about 80% of its US$22m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
How Risky Is Sol-Gel Technologies' Cash Burn Situation?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Sol-Gel Technologies' cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 5 warning signs for Sol-Gel Technologies that investors should know when investing in the stock.
Of course Sol-Gel Technologies 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 with high insider ownership.
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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.
