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Aptorum Group Limited's (NASDAQ:APM) Single Biggest Risk For Investors

Simply Wall St

Trailing twelve-month data shows us that Aptorum Group Limited's (NASDAQ:APM) earnings loss has accumulated to -US$18.4m. Although some investors expected this, their belief in the path to profitability for Aptorum Group may be wavering. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Aptorum Group is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Aptorum Group’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.

View our latest analysis for Aptorum Group

What is cash burn?

With a negative free cash flow of -US$16.1m, Aptorum Group is chipping away at its US$6.1m cash reserves in order to run its business. The riskiest factor facing investors of Aptorum Group is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the exciting, fast-growing biotech industry often face this problem, and Aptorum Group is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

NasdaqGM:APM Income Statement, September 19th 2019

When will Aptorum Group need to raise more cash?

One way to measure the cost to Aptorum Group of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).

Free cash outflows declined by 61% over the past year, which could be an indication of Aptorum Group putting the brakes on ramping up high growth. Given the level of cash left in the bank, if Aptorum Group maintained its cash burn rate of -US$16.1m, it could still run out of cash within the next few of months. Although this is a relatively simplistic calculation, and Aptorum Group may continue to reduce its costs further or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.

Next Steps:

Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how APM is expected to perform in the future. I recommend you continue to research Aptorum Group to get a better picture of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for APM’s future growth? Take a look at our free research report of analyst consensus for APM’s outlook.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Aptorum Group’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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.