We're Hopeful That Arcadia Biosciences (NASDAQ:RKDA) Will Use Its Cash Wisely
We can readily understand why investors are attracted to unprofitable companies. 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.
Given this risk, we thought we'd take a look at whether Arcadia Biosciences (NASDAQ:RKDA) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for Arcadia Biosciences
How Long Is Arcadia Biosciences' Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Arcadia Biosciences last reported its balance sheet in September 2022, it had zero debt and cash worth US$23m. Looking at the last year, the company burnt through US$18m. Therefore, from September 2022 it had roughly 15 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Arcadia Biosciences Growing?
It was fairly positive to see that Arcadia Biosciences reduced its cash burn by 32% during the last year. Unfortunately, however, operating revenue declined by 5.2% during the period. On balance, we'd say the company is improving over time. 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 Arcadia Biosciences Raise More Cash Easily?
Even though it seems like Arcadia Biosciences is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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).
Arcadia Biosciences has a market capitalisation of US$247m and burnt through US$18m last year, which is 7.5% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Arcadia Biosciences' Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Arcadia Biosciences' cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Arcadia Biosciences' situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Arcadia Biosciences that investors should know when investing in the stock.
Of course Arcadia Biosciences 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.
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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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