We're Hopeful That Acasti Pharma (CVE:ACST) Will Use Its Cash Wisely
Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Acasti Pharma (CVE:ACST) shareholders 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. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Acasti Pharma
How Long Is Acasti Pharma's 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. In December 2022, Acasti Pharma had US$31m in cash, and was debt-free. Looking at the last year, the company burnt through US$16m. That means it had a cash runway of about 2.0 years as of December 2022. Notably, however, analysts think that Acasti Pharma will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
How Is Acasti Pharma's Cash Burn Changing Over Time?
Because Acasti Pharma isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. 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 Acasti Pharma Raise More Cash Easily?
While Acasti Pharma is showing a solid reduction in its cash burn, 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. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Acasti Pharma has a market capitalisation of US$22m and burnt through US$16m last year, which is 73% of the company's market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Acasti Pharma's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Acasti Pharma's cash burn. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its cash burn relative to its market cap is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 4 warning signs for Acasti Pharma you should be aware of, and 2 of them are potentially serious.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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