It is easy to understand why investors are attracted to unprofitable companies. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mineral discovery. Still, only an idiot would ignore the risk that a loss-making company would burn up its cash too quickly.
So should Sesen Bio (NASDAQ: SESN) Are shareholders worried about its consumption of cash? For the purposes of this article, cash consumption is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash flow track.
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How long is Sesen Bio’s cash trail?
A company’s cash flow track is calculated by dividing its cash reserve by its cash consumption. As of September 2021, Sesen Bio had US $ 175 million in cash and no debt. Importantly, his cash consumption was US $ 65 million in the past twelve months. This means he had a cash trail of around 2.7 years as of September 2021. It’s arguably a cautious and reasonable runway length to have. The image below shows how his cash balance has evolved over the past few years.
How well does Sesen Bio grow?
Sesen Bio has actually increased its cash consumption by 79% over the past year, which shows that it is boosting investment in the business. As if that weren’t enough, operating revenues also fell by 42%, which makes us very suspicious. Looking at these two factors together makes us nervous about where the business seems to be going. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at how the business is expected to grow over the next few years.
Can Sesen Bio easily raise more money?
While Sesen Bio seems to be in a pretty good position, it’s still worth considering how easily he could raise more cash, even just to fuel faster growth. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Many companies end up issuing new shares to finance their future growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Sesen Bio has a market cap of US $ 182 million and spent US $ 65 million last year, or 36% of the market value of the company. That’s a pretty noticeable cash expense, so if the company were to sell shares to cover the cost of operations for another year, shareholders would suffer costly dilution.
Is Sesen Bio’s Cash Burn a concern?
On this analysis of Sesen Bio’s cash burn, we think that his cash flow track was reassuring, while the decline in his income worries us a little. We don’t think its consumption of cash is particularly problematic, but after looking at the range of factors in this article, we believe shareholders should watch how it evolves over time. On another note, we conducted a thorough investigation of the company and identified 4 warning signs for Sesen Bio (2 are a bit of a concern!) That you should know before investing here.
If you’d rather discover another business with better fundamentals, don’t miss this free list of interesting companies that have HIGH ROE and low debt or this list of stocks that are all expected to grow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.