We can easily understand why investors are attracted to unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
Given this risk, we thought we would examine whether Therapeutic Aerovate (NASDAQ:AVTE) shareholders should be concerned about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
Check out our latest analysis for Aerovate Therapeutics
When could Aerovate Therapeutics run out of money?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. When Aerovate Therapeutics last released its balance sheet in March 2022, it had no debt and cash worth $161 million. Looking at last year, the company burned US$29 million. Therefore, as of March 2022, it had 5.5 years of cash trail. While this is just a measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Below you can see how its liquidity has changed over time.
How is Aerovate Therapeutics cash burn changing over time?
Since Aerovate Therapeutics is not currently generating revenue, we consider it to be an early-stage business. Nonetheless, we can still look at its cash burn trajectory as part of our assessment of its cash burn situation. In fact, he has dramatically increased his spending over the past year, increasing cash burn by 181%. With spending growing so rapidly, shareholders are hoping the cash will be spent wisely. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
How difficult would it be for Aerovate Therapeutics to raise more funds for growth?
Given its cash burn trajectory, Aerovate Therapeutics shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Companies can raise capital either through debt or equity. Many companies end up issuing new shares to fund their future growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
Aerovate Therapeutics’ cash burn of US$29 million represents approximately 7.7% of its market capitalization of US$382 million. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
How risky is Aerovate Therapeutics’ cash burn situation?
As you can probably tell by now, we’re not too worried about Aerovate Therapeutics’ cash burn. For example, we think its cash trail suggests the business is on the right track. While it must be admitted that its growing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to cash burn. Based on the factors mentioned in this article, we think its cash burn situation deserves some attention from shareholders, but we don’t think they should be concerned. On another note, Aerovate Therapeutics has 5 warning signs (and 2 that are concerning) that we think you should know about.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.