As the US$994m market cap Aerie Pharmaceuticals, Inc. (NASDAQ:AERI) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Aerie Pharmaceuticals is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Aerie Pharmaceuticals may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
Currently, Aerie Pharmaceuticals has US$109m in cash holdings and producing negative free cash flow of -US$175.3m. The biggest threat facing Aerie Pharmaceuticals investors is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as pharma. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will Aerie Pharmaceuticals need to raise more cash?
One way to measure the cost to Aerie Pharmaceuticals of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In Aerie Pharmaceuticals’s case, its cash outflows fell by 36% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Aerie Pharmaceuticals’s operations and the company may need to raise more capital within the year. Even though this is analysis is fairly basic, and Aerie Pharmaceuticals still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
The risks involved in investing in loss-making Aerie Pharmaceuticals means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how AERI is expected to perform in the future. I recommend you continue to research Aerie Pharmaceuticals to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AERI’s future growth? Take a look at our free research report of analyst consensus for AERI’s outlook.
- Valuation: What is AERI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AERI is currently mispriced by the market.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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