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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we’d take a look at whether Arecor Therapeutics (LON:AREC) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
View our latest analysis for Arecor Therapeutics
How Long Is Arecor Therapeutics’ Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Arecor Therapeutics last reported its December 2023 balance sheet in June 2024, it had zero debt and cash worth UK£6.8m. In the last year, its cash burn was UK£6.0m. So it had a cash runway of approximately 14 months from December 2023. 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. However, if we extrapolate the company’s recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.
How Well Is Arecor Therapeutics Growing?
We reckon the fact that Arecor Therapeutics managed to shrink its cash burn by 46% over the last year is rather encouraging. Having said that, the revenue growth of 90% was considerably more inspiring. 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. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Arecor Therapeutics Raise More Cash Easily?
Even though it seems like Arecor Therapeutics is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Since it has a market capitalisation of UK£32m, Arecor Therapeutics’ UK£6.0m in cash burn equates to about 18% of its market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is Arecor Therapeutics’ Cash Burn Situation?
The good news is that in our view Arecor Therapeutics’ cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn reduction, while on the other it can also boast very strong revenue growth. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we’re not too worried about its rate of cash burn. On another note, Arecor Therapeutics has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com