Companies like Scandion Oncology (STO:SCOL) are able to invest in growth

We can easily understand why investors are attracted to unprofitable companies. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?

So the natural question for Scandinavia Oncology (STO:SCOL) shareholders is whether they should be concerned about its cash burn rate. 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). We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.

Check out our latest analysis for Scandion Oncology

How long is the Scandion Oncology cash trail?

A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash burn. As of September 2021, Scandion Oncology had 117 million kr in cash and no debt. Last year, its cash consumption was 44 million kr. It therefore had a cash trail of approximately 2.7 years as of September 2021. Notably, however, the one analyst we see covering the stock believes Scandion Oncology will break even (at a cash flow level available) before that date. If that happens, then the length of his cash trail today would become a moot point. You can see how his cash balance has changed over time in the image below.

OM:SCOL Debt to Equity Historical February 1, 2022

How is Scandion Oncology’s cash burn changing over time?

Scandion Oncology has not recorded any revenue in the last year, indicating that it is a start-up company that is still growing its business. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. Its cash consumption exploded positively last year, up 475%. Given this large increase in expenses, the company’s cash trail will quickly shrink as it depletes its cash reserves. While the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.

How easily can Scandion Oncology raise funds?

Given its cash-burning trajectory, Scandion Oncology shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Companies can raise capital either through debt or equity. Typically, a company will sell new stock on its own to raise cash and drive growth. We can compare a company’s cash burn to its market capitalization to get an idea of ​​how many new shares a company would need to issue to fund a year’s operations.

Scandion Oncology has a market cap of 396 million kr and burned 44 million kr last year, or 11% of the company’s market value. Given this situation, it’s fair to say that the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How risky is Scandion Oncology’s cash burn situation?

As you can probably tell by now, we’re not too worried about Scandion Oncology’s cash burn. In particular, we think its cash trail stands out as proof that the company is on top of spending. While we find its growing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we’re comfortable with. There is no doubt that shareholders can rejoice that at least one analyst predicts it will break even before too long. After considering the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its money, as it appears to be on track to meet its medium-term needs. Separately, we looked at different risks affecting the business and identified 3 warning signs for Scandion Oncology (of which 1 is worrying!) that you should know about.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders are buying, and this list of growth stocks (based on analyst forecasts)

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.

Comments are closed.