Companies Like Arena Pharmaceuticals (NASDAQ:ARNA) Are In A Position To Invest In Growth
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, 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 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 Arena Pharmaceuticals (NASDAQ:ARNA) 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’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Arena Pharmaceuticals
Does Arena Pharmaceuticals Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Arena Pharmaceuticals last reported its balance sheet in June 2020, it had zero debt and cash worth US$1.2b. Importantly, its cash burn was US$289m over the trailing twelve months. That means it had a cash runway of about 4.0 years as of June 2020. There’s no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.
Is Arena Pharmaceuticals’ Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because Arena Pharmaceuticals actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 99%, which is rather concerning. 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 Arena Pharmaceuticals Raise Cash?
Given its problematic fall in revenue, Arena Pharmaceuticals shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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$5.0b, Arena Pharmaceuticals’ US$289m in cash burn equates to about 5.7% of its 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 Arena Pharmaceuticals’ Cash Burn?
As you can probably tell by now, we’re not too worried about Arena Pharmaceuticals’ cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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 an in-depth view of risks, we’ve identified 3 warning signs for Arena Pharmaceuticals that you should be aware of before investing.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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. 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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