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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Adaptive Biotechnologies (NASDAQ:ADPT) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Adaptive Biotechnologies' Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2020, Adaptive Biotechnologies had US$835m in cash, and was debt-free. In the last year, its cash burn was US$148m. Therefore, from September 2020 it had 5.6 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
Is Adaptive Biotechnologies' Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Adaptive Biotechnologies actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. While it's not that amazing, we still think that the 18% increase in revenue from operations was a positive. 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.
Can Adaptive Biotechnologies Raise More Cash Easily?
While Adaptive Biotechnologies is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Adaptive Biotechnologies has a market capitalisation of US$8.6b and burnt through US$148m last year, which is 1.7% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Adaptive Biotechnologies' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Adaptive Biotechnologies is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Its revenue growth wasn't quite as good, but was still rather encouraging! Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, Adaptive Biotechnologies has 4 warning signs (and 1 which can't be ignored) we think you should know about.
Of course Adaptive Biotechnologies may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
This article by Simply Wall St is general in nature. 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.
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