Yahoo Finance We're A Little Worried About Sonnet BioTherapeutics Holdings' (NASDAQ:SONN) 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, 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 should Sonnet BioTherapeutics Holdings (NASDAQ:SONN) shareholders be worried about its 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.
See our latest analysis for Sonnet BioTherapeutics Holdings
Does Sonnet BioTherapeutics Holdings Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2021, Sonnet BioTherapeutics Holdings had cash of US$28m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$23m over the trailing twelve months. That means it had a cash runway of around 15 months as of September 2021. 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. The image below shows how its cash balance has been changing over the last few years.
How Is Sonnet BioTherapeutics Holdings' Cash Burn Changing Over Time?
Whilst it's great to see that Sonnet BioTherapeutics Holdings has already begun generating revenue from operations, last year it only produced US$484k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 44% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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 Sonnet BioTherapeutics Holdings To Raise More Cash For Growth?
While Sonnet BioTherapeutics Holdings does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Sonnet BioTherapeutics Holdings' cash burn of US$23m is about 80% of its US$28m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
So, Should We Worry About Sonnet BioTherapeutics Holdings' Cash Burn?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Sonnet BioTherapeutics Holdings' cash runway 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, Sonnet BioTherapeutics Holdings has 7 warning signs (and 4 which don't sit too well with us) we think you should know about.
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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.
