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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Adaptimmune Therapeutics (NASDAQ:ADAP) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Adaptimmune Therapeutics Have A Long 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. In September 2019, Adaptimmune Therapeutics had US$103m in cash, and was debt-free. Looking at the last year, the company burnt through US$134m. So it had a cash runway of approximately 9 months from September 2019. Notably, analysts forecast that Adaptimmune Therapeutics will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Adaptimmune Therapeutics Growing?
Some investors might find it troubling that Adaptimmune Therapeutics is actually increasing its cash burn, which is up 34% in the last year. The fact that its operating revenue tanked 97% in the last year is even more worrying. 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Adaptimmune Therapeutics Raise More Cash Easily?
Since Adaptimmune Therapeutics can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).
Since it has a market capitalisation of US$145m, Adaptimmune Therapeutics's US$134m in cash burn equates to about 93% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
So, Should We Worry About Adaptimmune Therapeutics's Cash Burn?
There are no prizes for guessing that we think Adaptimmune Therapeutics's cash burn is a bit of a worry. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. And although we accept its increasing cash burn wasn't as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Adaptimmune Therapeutics insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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