Yahoo Finance We're Hopeful That Avecho Biotechnology (ASX:AVE) Will Use Its Cash Wisely
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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Avecho Biotechnology (ASX:AVE) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Avecho Biotechnology
How Long Is Avecho Biotechnology's 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. In December 2020, Avecho Biotechnology had AU$1.9m in cash, and was debt-free. Importantly, its cash burn was AU$1.4m over the trailing twelve months. So it had a cash runway of approximately 16 months from December 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Easily Can Avecho Biotechnology Raise Cash?
Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Avecho Biotechnology has a market capitalisation of AU$31m and burnt through AU$1.4m last year, which is 4.6% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
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 put it simply, we think its cash burn situation is totally fine given it is still developing its business. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Avecho Biotechnology (of which 2 are a bit concerning!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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 (at) simplywallst.com.
