Is Adaptimmune Therapeutics (NASDAQ:ADAP) In A Good Position To Invest In Growth?
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Adaptimmune Therapeutics (NASDAQ:ADAP) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Adaptimmune Therapeutics
When Might Adaptimmune Therapeutics Run Out Of Money?
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 Adaptimmune Therapeutics last reported its balance sheet in December 2022, it had zero debt and cash worth US$205m. In the last year, its cash burn was US$172m. That means it had a cash runway of around 14 months as of December 2022. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. 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.
Is Adaptimmune Therapeutics' Revenue Growing?
Given that Adaptimmune Therapeutics actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The good news is that operating revenue growth was as flash as a rat with a gold tooth, up 342% in that time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Adaptimmune Therapeutics To Raise More Cash For Growth?
While Adaptimmune Therapeutics' revenue growth truly does shine bright, it's important not to ignore the possibility that it might need more cash, at some point, even if only to optimise its growth plans. 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 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).
Adaptimmune Therapeutics has a market capitalisation of US$232m and burnt through US$172m last year, which is 74% of the company's market value. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
So, Should We Worry About Adaptimmune Therapeutics' Cash Burn?
On this analysis of Adaptimmune Therapeutics' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Adaptimmune Therapeutics' cash burn is a risk, based on the factors we mentioned in this article. On another note, Adaptimmune Therapeutics has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.
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