There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Abeona Therapeutics (NASDAQ:ABEO) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Abeona Therapeutics'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 Abeona Therapeutics last reported its balance sheet in September 2019, it had zero debt and cash worth US$48m. Looking at the last year, the company burnt through US$83m. That means it had a cash runway of around 7 months as of September 2019. 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 Is Abeona Therapeutics's Cash Burn Changing Over Time?
In our view, Abeona Therapeutics doesn't yet produce significant amounts of operating revenue, since it reported just US$482k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The skyrocketing cash burn up 127% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. 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 Abeona Therapeutics Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, Abeona Therapeutics shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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$172m, Abeona Therapeutics's US$83m in cash burn equates to about 48% of its market value. From this perspective, it seems that the company spent a hugh amount relative to its market value, and we'd be very wary of a painful capital raising.
How Risky Is Abeona Therapeutics's Cash Burn Situation?
As you can probably tell by now, we're rather concerned about Abeona Therapeutics's cash burn. Take, for example, its increasing cash burn, which suggests the company may have difficulty funding itself, in the future. While not as bad as its increasing cash burn, its cash burn relative to its market cap is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Notably, our data indicates that Abeona Therapeutics insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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