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 Athersys (NASDAQ:ATHX) 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.
Check out our latest analysis for Athersys
When Might Athersys Run Out Of Money?
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. Athersys has such a small amount of debt that we’ll set it aside, and focus on the US$81m in cash it held at June 2020. Looking at the last year, the company burnt through US$44m. That means it had a cash runway of around 22 months as of June 2020. 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 Is Athersys’ Cash Burn Changing Over Time?
In our view, Athersys doesn’t yet produce significant amounts of operating revenue, since it reported just US$10k in the last twelve months. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 45%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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.
How Hard Would It Be For Athersys To Raise More Cash For Growth?
Given its cash burn trajectory, Athersys shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Athersys’ cash burn of US$44m is about 12% of its US$357m market capitalisation. 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.
How Risky Is Athersys’ Cash Burn Situation?
On this analysis of Athersys’ cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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 Athersys’ situation. On another note, Athersys has 6 warning signs (and 3 which are potentially serious) we think you should know about.
Of course Athersys 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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected].
