Can Aridis Pharmaceuticals (NASDAQ:ARDS) Afford To Invest In Growth?
Just because a business does not make any money, does not mean that the stock will go down. 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.
So should Aridis Pharmaceuticals (NASDAQ:ARDS) shareholders 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. Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Aridis Pharmaceuticals
How Long Is Aridis Pharmaceuticals' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2021, Aridis Pharmaceuticals had US$18m in cash, and was debt-free. In the last year, its cash burn was US$25m. So it had a cash runway of approximately 9 months from September 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Aridis Pharmaceuticals' Cash Burn Changing Over Time?
Whilst it's great to see that Aridis Pharmaceuticals has already begun generating revenue from operations, last year it only produced US$548k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 112% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Aridis Pharmaceuticals Raise More Cash Easily?
Given its cash burn trajectory, Aridis Pharmaceuticals shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Aridis Pharmaceuticals' cash burn of US$25m is about 64% of its US$39m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
How Risky Is Aridis Pharmaceuticals' Cash Burn Situation?
There are no prizes for guessing that we think Aridis Pharmaceuticals' cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. And although we accept its cash runway 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. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Aridis Pharmaceuticals (4 are a bit unpleasant!) that you should be aware of before investing here.
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)
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
