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We can readily understand why investors are attracted to unprofitable companies. 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.
So should Acurx Pharmaceuticals (NASDAQ:ACXP) shareholders 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Acurx Pharmaceuticals Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2021, Acurx Pharmaceuticals had US$17m in cash, and was debt-free. In the last year, its cash burn was US$2.6m. That means it had a cash runway of about 6.6 years as of June 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
How Is Acurx Pharmaceuticals' Cash Burn Changing Over Time?
Because Acurx Pharmaceuticals isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 29% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Acurx Pharmaceuticals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For Acurx Pharmaceuticals To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Acurx Pharmaceuticals to raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Acurx Pharmaceuticals has a market capitalisation of US$44m and burnt through US$2.6m last year, which is 5.8% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Acurx Pharmaceuticals' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Acurx Pharmaceuticals' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its cash burn reduction wasn't quite as good, but was still rather encouraging! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Acurx Pharmaceuticals has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
Of course Acurx Pharmaceuticals 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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