Ascendis Pharma A/S (NASDAQ:ASND) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Ascendis Pharma is spending more money than it earns, it will need to fund its expenses via external sources of capital. Ascendis Pharma may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
With a negative free cash flow of -€153.7m, Ascendis Pharma is chipping away at its €690m cash reserves in order to run its business. The biggest threat facing Ascendis Pharma investors is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as biotech. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will Ascendis Pharma need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Ascendis Pharma has to spend each year in order to keep its business running.
Free cash outflows declined by 39% over the past year, which could be an indication of Ascendis Pharma putting the brakes on ramping up high growth. If Ascendis Pharma kept its cash burn rate at -€153.7m, it may not need to raise capital for another couple of years. Even though this is analysis is fairly basic, and Ascendis Pharma still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the Ascendis Pharma operation is, and when things may have to change.
This analysis isn’t meant to deter you from Ascendis Pharma, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at its current rate, it will not be able to sustain its operations given the current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should Ascendis Pharma come to market to fund its operations. I admit this is a fairly basic analysis for ASND's financial health. Other important fundamentals need to be considered as well. You should continue to research Ascendis Pharma to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ASND’s future growth? Take a look at our free research report of analyst consensus for ASND’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Ascendis Pharma’s board and the CEO’s back ground.
- 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.
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