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We Think Avecho Biotechnology (ASX:AVE) Can Afford To Drive Business Growth

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, Avecho Biotechnology (ASX:AVE) shareholders have done very well over the last year, with the share price soaring by 325%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether Avecho Biotechnology'scash burn is too risky In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Avecho Biotechnology

Does Avecho Biotechnology Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. Avecho Biotechnology has such a small amount of debt that we'll set it aside, and focus on the AU$2.5m in cash it held at June 2020. In the last year, its cash burn was AU$2.2m. So it had a cash runway of approximately 14 months from June 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
debt-equity-history-analysis

How Easily Can Avecho Biotechnology Raise Cash?

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).

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Avecho Biotechnology's cash burn of AU$2.2m is about 8.2% of its AU$27m market capitalisation. 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.

Is Avecho Biotechnology's Cash Burn A Worry?

Given it's an early stage company, we don't have a lot of data with which to judge Avecho Biotechnology's cash burn. However, it is fair to say that its cash burn relative to its market cap gave us comfort. To be frank most cash burning companies are relatively risky, but this one seems safer than most, in our view. On another note, Avecho Biotechnology has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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 editorial-team@simplywallst.com.