Yahoo Finance Here's Why We're Watching Avacta Group's (LON:AVCT) Cash Burn Situation
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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Avacta Group (LON:AVCT) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Avacta Group
How Long Is Avacta Group's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at July 2019, Avacta Group had cash of UK£6.5m and no debt. In the last year, its cash burn was UK£9.6m. Therefore, from July 2019 it had roughly 8 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. The image below shows how its cash balance has been changing over the last few years.
How Well Is Avacta Group Growing?
Some investors might find it troubling that Avacta Group is actually increasing its cash burn, which is up 21% in the last year. The good news is that operating revenue increased by 49% in the last year, indicating that the business is gaining some traction. It seems to be growing nicely. 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 Hard Would It Be For Avacta Group To Raise More Cash For Growth?
While Avacta Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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).
Avacta Group has a market capitalisation of UK£30m and burnt through UK£9.6m last year, which is 32% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Avacta Group's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Avacta Group's revenue growth was relatively promising. Summing up, we think the Avacta Group's cash burn is a risk, based on the factors we mentioned in this article. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Avacta Group's CEO gets paid each year.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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