We can readily understand why investors are attracted to unprofitable companies. For example, Twist Bioscience (NASDAQ:TWST) shareholders have done very well over the last year, with the share price soaring by 104%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether Twist Bioscience's cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

When Might Twist Bioscience Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2023, Twist Bioscience had US$311m in cash, and was debt-free. Looking at the last year, the company burnt through US$129m. That means it had a cash runway of about 2.4 years as of December 2023. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Twist Bioscience Growing?

We reckon the fact that Twist Bioscience managed to shrink its cash burn by 45% over the last year is rather encouraging. On top of that, operating revenue was up 22%, making for a heartening combination We think it is growing rather well, upon reflection. 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.

Can Twist Bioscience Raise More Cash Easily?

We are certainly impressed with the progress Twist Bioscience has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Twist Bioscience's cash burn of US$129m is about 6.6% of its US$1.9b market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Twist Bioscience's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Twist Bioscience 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. Its revenue growth wasn't quite as good, but was still rather encouraging! Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Twist Bioscience that potential shareholders should take into account before putting money into a stock.

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

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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.