Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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.
Given this risk, we thought we'd take a look at whether AVROBIO (NASDAQ:AVRO) shareholders should be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does AVROBIO Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When AVROBIO last reported its balance sheet in March 2020, it had zero debt and cash worth US$258m. Importantly, its cash burn was US$69m over the trailing twelve months. So it had a cash runway of about 3.7 years from March 2020. Importantly, analysts think that AVROBIO will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Is AVROBIO's Cash Burn Changing Over Time?
Because AVROBIO isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With the cash burn rate up 35% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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.
How Easily Can AVROBIO Raise Cash?
While AVROBIO does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
Since it has a market capitalisation of US$518m, AVROBIO's US$69m in cash burn equates to about 13% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is AVROBIO's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way AVROBIO is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, AVROBIO has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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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