There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Aduro Biotech (NASDAQ:ADRO) shareholders have done very well over the last year, with the share price soaring by 198%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given its strong share price performance, we think it's worthwhile for Aduro Biotech shareholders to consider whether its cash burn is concerning. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.
Does Aduro Biotech Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Aduro Biotech last reported its balance sheet in June 2020, it had zero debt and cash worth US$171m. Importantly, its cash burn was US$68m over the trailing twelve months. That means it had a cash runway of about 2.5 years as of June 2020. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Aduro Biotech Growing?
Some investors might find it troubling that Aduro Biotech is actually increasing its cash burn, which is up 27% in the last year. Having said that, it's revenue is up a very solid 91% in the last year, so there's plenty of reason to believe in the growth story. The company needs to keep up that growth, if it is to really please shareholders. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Aduro Biotech Raise More Cash Easily?
There's no doubt Aduro Biotech seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of US$232m, Aduro Biotech's US$68m in cash burn equates to about 29% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Aduro Biotech's Cash Burn?
On this analysis of Aduro Biotech's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Aduro Biotech (of which 1 is a bit concerning!) you should know about.
Of course Aduro Biotech 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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