As the US$39m market cap Akari Therapeutics, Plc (NASDAQ:AKTX) 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. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Akari Therapeutics is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Akari Therapeutics’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?
Currently, Akari Therapeutics has US$2.7m in cash holdings and producing negative free cash flow of -US$14.4m. The biggest threat facing Akari Therapeutics investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the fast-growth pharma industry. 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 Akari Therapeutics 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 Akari Therapeutics has to spend each year in order to keep its business running.
In the past year, free cash outflows rose by 3.8%, which is fairly normal for a small-cap company. Though, if cash burn continues to rise at this rate, given how much cash reserves Akari Therapeutics currently has, it will actually need to raise capital again within the next couple of months! Moreover, even if Akari Therapeutics kept its cash burn level at -US$14.4m, it could still need to raise capital within the next year. Although this is a relatively simplistic calculation, and Akari Therapeutics could reduce its costs or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Akari Therapeutics operation is, and when things may have to change.
This analysis isn’t meant to deter you from Akari Therapeutics, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that if the company was to continue to grow 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 a more attractive price, should Akari Therapeutics raise equity to fund its operations. I admit this is a fairly basic analysis for AKTX's financial health. Other important fundamentals need to be considered as well. I recommend you continue to research Akari Therapeutics to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AKTX’s future growth? Take a look at our free research report of analyst consensus for AKTX’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Akari Therapeutics’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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