There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.
Given this risk, we thought we would examine whether Therapeutic entry (NASDAQ:TRDA) shareholders should be concerned about its cash burn. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to fund its growth (also known as negative free cash flow). Let’s start with a review of the company’s cash flow, relative to its cash burn.
See our latest analysis for Entrada Therapeutics
Does Entrada Therapeutics have a long cash trail?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. As of March 2022, Entrada Therapeutics had cash of US$264 million and no debt. Importantly, its cash burn was US$68 million over the last twelve months. That means he had a cash trail of around 3.9 years in March 2022. No doubt that’s a reassuringly long trail. You can see how his cash balance has changed over time in the image below.
How is Entrada Therapeutics’ cash burn changing over time?
Since Entrada Therapeutics is not currently generating revenue, we consider it to be an early-stage business. Nonetheless, we can still look at its cash burn trajectory as part of our assessment of its cash burn situation. Soaring cash burn of 125% year over year is certainly testing our nerves. This type of spending growth rate cannot continue for very long before causing balance sheet weakness, generally speaking. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
How easily can Entrada Therapeutics raise funds?
Although Entrada Therapeutics has a strong cash trail, its cash burn trajectory may cause some shareholders to think ahead to when the company might need to raise more cash. In general, a listed company can raise new funds by issuing shares or by going into debt. Many companies end up issuing new shares to fund their future growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
With a market capitalization of $217 million, Entrada Therapeutics’ cash burn of $68 million equates to approximately 31% of its market value. This is not trivial, and if the company were to sell enough stock to fund another year’s growth at the current share price, you would likely see some pretty costly dilution.
Is Entrada Therapeutics’ cash burn a concern?
Even though its increasing consumption of cash makes us a bit nervous, we are bound to mention that we thought Entrada Therapeutics’ cash lead was quite promising. Cash-burning businesses are always on the riskier side of things, but after considering all the factors discussed in this short article, we’re not too worried about its cash burn rate. On a different note, we conducted a thorough investigation of the company and identified 4 warning signs for Entrada Therapeutics (2 are a little nasty!) that you should be aware of before investing here.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.