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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 software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Abeona Therapeutics (NASDAQ:ABEO) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Abeona Therapeutics' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Abeona Therapeutics last reported its balance sheet in December 2021, it had zero debt and cash worth US$45m. In the last year, its cash burn was US$70m. So it had a cash runway of approximately 8 months from December 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Abeona Therapeutics Growing?
Abeona Therapeutics boosted investment sharply in the last year, with cash burn ramping by 92%. That's pretty alarming given that operating revenue dropped 70% over the last year, though the business is likely attempting a strategic pivot. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Abeona Therapeutics Raise More Cash Easily?
Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Abeona Therapeutics could raise cash. Companies can raise capital through either debt or equity. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Abeona Therapeutics' cash burn of US$70m is about 177% of its US$39m market capitalisation. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
So, Should We Worry About Abeona Therapeutics' Cash Burn?
As you can probably tell by now, we're rather concerned about Abeona Therapeutics' cash burn. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. While not as bad as its cash burn relative to its market cap, its cash runway is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 6 warning signs for Abeona Therapeutics that investors should know when investing in the 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.