There is no doubt that it is possible to make money by owning shares of unprofitable companies. 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 Withho Biotechnology (ASX:AVE) shareholders is whether they should worry about its cash burn rate. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
How long is the Avecho Biotechnology 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 December 2021, Avecho Biotechnology had A$3.3 million in cash and was debt free. Looking at last year, the company spent A$3.3 million. So she had a cash trail of about 12 months from December 2021. To be frank, this type of short trail gets on our nerves, because it indicates that the company needs to significantly reduce its cash burn, or well raise funds imminently. You can see how his cash balance has changed over time in the image below.
How is cash burn at Avecho Biotechnology changing over time?
In our opinion, Avecho Biotechnology does not yet generate significant operating income, having only brought in 794,000 Australian dollars in the last twelve months. Therefore, for the purposes of this analysis, we will focus on how cash burn is tracked. Soaring cash burn of 131% year over year is certainly testing our nerves. This type of spending growth rate cannot continue for very long before causing balance sheet weakness, generally speaking. Avecho Biotechnology makes us a bit nervous due to its lack of substantial operating revenue. We therefore generally prefer stocks of this list of stocks whose analysts predict growth.
How difficult would it be for Avecho Biotechnology to raise more funds for growth?
Given that its cash burn is headed in the wrong direction, shareholders of Avecho Biotechnology may want to anticipate when the company may need to raise more cash. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their 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.
As its market capitalization is A$31 million, Avecho Biotechnology’s cash burn of A$3.3 million equates to approximately 11% of its market value. As a result, we risk the company being able to raise more cash for growth without too much trouble, but at the cost of some dilution.
Is Avecho Biotechnology’s cash burn a concern?
On this analysis of Avecho Biotechnology’s cash burn, we think its cash burn relative to its market capitalization was reassuring, while its growing cash burn worries us a bit. We don’t think its cash burn is particularly problematic, but after considering the range of factors discussed in this article, we think shareholders should monitor its evolution over time. On a different note, we conducted a thorough investigation of the company and identified 4 warning signs for Avecho Biotechnology (2 are significant!) which you should be aware of before investing here.
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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.