As the US$26m market cap Aileron Therapeutics, Inc. (NASDAQ:ALRN) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Aileron Therapeutics is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Aileron 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?
With a negative free cash flow of -US$31.1m, Aileron Therapeutics is chipping away at its US$32m cash reserves in order to run its business. The riskiest factor facing investors of Aileron Therapeutics is the potential for the company to run out of cash without the ability to raise more money. Not surprisingly, it is more common to find unprofitable companies in the high-growth biotech industry. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Aileron Therapeutics need to raise more cash?
One way to measure the cost to Aileron Therapeutics of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In Aileron Therapeutics’s case, its cash outflows fell by 33% last year, which may signal the company moving towards a more sustainable level of expenses. However, even if Aileron Therapeutics maintains its cash burn at the current level of -US$31.1m, then given the current level of cash in the bank, Aileron Therapeutics will still have to raise capital again in 1 years. Although this is a relatively simplistic calculation, and Aileron Therapeutics may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of 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.
This analysis isn’t meant to deter you from Aileron Therapeutics, but rather, to help you better understand the risks involved investing in loss-making companies. 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 Aileron Therapeutics be required to raise new funds to continue operating. Keep in mind I haven't considered other factors such as how ALRN is expected to perform in the future. I suggest you continue to research Aileron Therapeutics to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALRN’s future growth? Take a look at our free research report of analyst consensus for ALRN’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Aileron 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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