Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
So the natural question for Arbutus Biopharma (NASDAQ:ABUS) 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.
See our latest analysis for Arbutus Biopharma
How long is the Arbutus Biopharma cash trail?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of March 2022, Arbutus Biopharma had $165 million in cash and no debt. Last year, its cash burn was $30 million. This means that it had a cash trail of around 5.5 years in March 2022. While this is only a measure of its cash burn situation, it certainly gives us the impression that holders have nothing to fear. The image below shows how his cash balance has changed over the past few years.
How is Arbutus Biopharma growing?
We find the fact that Arbutus Biopharma has managed to reduce its cash burn by 45% over the past year to be quite encouraging. But it was the 185% operating revenue growth that really shined. We think he’s developing quite well, on second thought. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at the company’s expected growth over the next few years.
Can Arbutus Biopharma raise more money easily?
Although Arbutus Biopharma appears to be in a decent position, we believe it is still worth considering how easily it could raise more cash, should that prove desirable. 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. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
With a market capitalization of $361 million, Arbutus Biopharma’s cash burn of $30 million equates to approximately 8.3% of its market value. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
How risky is Arbutus Biopharma’s cash burn situation?
It may already be obvious to you that we are relatively comfortable with the way Arbutus Biopharma is burning cash. In particular, we believe that its revenue growth is proof that the company has its expenses under control. But it’s fair to say that its reduction in cash burn was also very reassuring. After considering the various metrics mentioned in this report, we are quite comfortable with how the company is spending its money, as it appears to be on track to meet its medium-term needs. On a different note, we conducted a thorough investigation of the company and identified 3 warning signs for Arbutus Biopharma (1 doesn’t suit us too much!) which 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.