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 Atossa Genetics (NASDAQ:ATOS) shareholders should 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Atossa Genetics's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Atossa Genetics had US$15m in cash, and was debt-free. In the last year, its cash burn was US$8.9m. So it had a cash runway of approximately 21 months from September 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.
How Is Atossa Genetics's Cash Burn Changing Over Time?
Atossa Genetics didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 8.1% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Atossa Genetics To Raise More Cash For Growth?
Since its cash burn is increasing (albeit only slightly), Atossa Genetics shareholders should still be mindful of the possibility it will require more 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 to 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).
Atossa Genetics has a market capitalisation of US$13m and burnt through US$8.9m last year, which is 68% of the company's market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Atossa Genetics's Cash Burn A Worry?
On this analysis of Atossa Genetics's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Atossa Genetics's cash burn is a risk, based on the factors we mentioned in this article. 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 Atossa Genetics CEO is paid..
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