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We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Athersys (NASDAQ:ATHX) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Athersys' Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. Athersys has such a small amount of debt that we'll set it aside, and focus on the US$64m in cash it held at March 2021. In the last year, its cash burn was US$68m. Therefore, from March 2021 it had roughly 11 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Athersys Growing?
Athersys boosted investment sharply in the last year, with cash burn ramping by 58%. And that is all the more of a concern in light of the fact that operating revenue was actually down by 66% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Athersys Raise Cash?
Athersys revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Athersys' cash burn of US$68m is about 20% of its US$335m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Athersys' Cash Burn A Worry?
We must admit that we don't think Athersys is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn't too bad, its falling revenue does leave us rather nervous. Summing up, we think the Athersys' cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Athersys (2 can't be ignored!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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