As the US$224m market cap Athersys, Inc. (NASDAQ:ATHX) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Selling new shares may dilute the value of existing shares on issue, and since Athersys is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Athersys’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
With a negative free cash flow of -US$30.2m, Athersys is chipping away at its US$44m cash reserves in order to run its business. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the exciting, fast-growing biotech industry often face this problem, and Athersys is no exception. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Athersys need to raise more cash?
One way to measure the cost to Athersys of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In Athersys’s case, its cash outflows fell by 12% last year, which may signal the company moving towards a more sustainable level of expenses. Though, if the company kept its cash burn level at -US$30.2m, it may not need to raise capital for another 1.5 years. Although this is a relatively simplistic calculation, and Athersys may continue to reduce its costs further or borrow money instead of raising new equity capital, 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.
The risks involved in investing in loss-making Athersys means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. 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. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Athersys raise capital to fund its growth. Keep in mind I haven't considered other factors such as how ATHX is expected to perform in the future. I recommend you continue to research Athersys to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATHX’s future growth? Take a look at our free research report of analyst consensus for ATHX’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Athersys’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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