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Will Albireo Pharma (NASDAQ:ALBO) Spend Its Cash Wisely?

Simply Wall St

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, 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 Albireo Pharma (NASDAQ:ALBO) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Albireo Pharma

How Long Is Albireo Pharma's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Albireo Pharma last reported its balance sheet in June 2019, it had zero debt and cash worth US$158m. Looking at the last year, the company burnt through US$47m. So it had a cash runway of about 3.3 years from June 2019. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

NasdaqCM:ALBO Historical Debt, November 2nd 2019

How Well Is Albireo Pharma Growing?

Notably, Albireo Pharma actually ramped up its cash burn very hard and fast in the last year, by 139%, signifying heavy investment in the business. That's pretty alarming given that operating revenue dropped 78% over the last year, though the business is likely attempting a strategic pivot. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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.

How Hard Would It Be For Albireo Pharma To Raise More Cash For Growth?

Even though it seems like Albireo Pharma is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Albireo Pharma's cash burn of US$47m is about 19% of its US$244m market capitalisation. 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 Albireo Pharma's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Albireo Pharma's cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Albireo Pharma CEO is paid..

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)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.