StemCell Therapy

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Seattle Genetics (NASDAQ:SGEN) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Seattle Genetics

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Seattle Genetics last reported its balance sheet in December 2019, it had zero debt and cash worth US$811m. In the last year, its cash burn was US$234m. That means it had a cash runway of about 3.5 years as of December 2019. Notably, however, analysts think that Seattle Genetics will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

NasdaqGS:SGEN Historical Debt April 22nd 2020

Some investors might find it troubling that Seattle Genetics is actually increasing its cash burn, which is up 4.3% in the last year. The silver lining is that revenue was up 40%, showing the business is growing at the top line. On balance, we'd say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

There's no doubt Seattle Genetics 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of US$24b, Seattle Genetics's US$234m in cash burn equates to about 1.0% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

It may already be apparent to you that we're relatively comfortable with the way Seattle Genetics is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking an in-depth view of risks, we've identified 2 warning signs for Seattle Genetics that you should be aware of before investing.

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Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

Excerpt from:
Seattle Genetics (NASDAQ:SGEN) Is In A Strong Position To Grow Its Business - Yahoo Finance

This entry was posted on April 23, 2020 at 1:44 pm and is filed under Genetics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. |