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Trailing twelve-month data shows us that Advaxis, Inc.'s (NASDAQ:ADXS) earnings loss has accumulated to -US$25.0m. Although some investors expected this, their belief in the path to profitability for Advaxis may be wavering. 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 Advaxis is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Advaxis 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 -US$41.5m, Advaxis is chipping away at its US$42m 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. Furthermore, it is not uncommon to find loss-makers in an industry such as biotech. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Advaxis 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 Advaxis has to spend each year in order to keep its business running.
Free cash outflows declined by 20% over the past year, which could be an indication of Advaxis putting the brakes on ramping up high growth. Though, if the company kept its cash burn level at -US$41.5m, it may not need to raise capital for another 1 years. Even though this is analysis is fairly basic, and Advaxis still can cut its overhead further, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Advaxis operation is, and when things may have to change.
The risks involved in investing in loss-making Advaxis 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 this 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 Advaxis be required to raise new funds to continue operating. Keep in mind I haven't considered other factors such as how ADXS is expected to perform in the future. I recommend you continue to research Advaxis to get a better picture of the company by looking at:
Future Outlook: What are well-informed industry analysts predicting for ADXS’s future growth? Take a look at our free research report of analyst consensus for ADXS’s outlook.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Advaxis’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 31 July 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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