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We're Hopeful That Aridis Pharmaceuticals (NASDAQ:ARDS) 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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Aridis Pharmaceuticals (NASDAQ:ARDS) shareholders is whether they should be concerned by its rate of cash burn. 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Aridis Pharmaceuticals

How Long Is Aridis Pharmaceuticals'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. When Aridis Pharmaceuticals last reported its balance sheet in September 2019, it had zero debt and cash worth US$17m. Importantly, its cash burn was US$21m over the trailing twelve months. So it had a cash runway of approximately 10 months from September 2019. Notably, analysts forecast that Aridis Pharmaceuticals will break even (at a free cash flow level) in about 13 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. The image below shows how its cash balance has been changing over the last few years.

NasdaqCM:ARDS Historical Debt, January 17th 2020
NasdaqCM:ARDS Historical Debt, January 17th 2020

How Well Is Aridis Pharmaceuticals Growing?

In the last twelve months, Aridis Pharmaceuticals kept its cash burn steady. And while its operating revenue growth of 12% didn't shoot the lights out, it does, at least, point to business traction. On balance, we'd say the company is improving over time. 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.

Can Aridis Pharmaceuticals Raise More Cash Easily?

Given the trajectory of Aridis Pharmaceuticals's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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).

Aridis Pharmaceuticals has a market capitalisation of US$66m and burnt through US$21m last year, which is 32% of the company's 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 Aridis Pharmaceuticals's Cash Burn?

On this analysis of Aridis Pharmaceuticals's cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Aridis Pharmaceuticals CEO is paid..

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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