There is no doubt that money can be earned by owning shares of unprofitable companies. For example, even though Salesforce.com, a software-as-a-service company, has been losing money for years while increasing recurring revenue, if you had held stocks since 2005, you would have done very well indeed. But the harsh reality is that many loss-making companies burn all their money and go bankrupt.
Hence, the natural question for Active biotechnologies (STO: ACTI) shareholders is whether they should be concerned about its rate of money consumption. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to finance its growth. First, we will determine its cash run by comparing its cash consumption with its cash reserves.
Check out our latest analysis for Active Biotech
How long does the Active Biotech checkout track last?
A cash track is defined as the time it would take a company to run out of money if it continued spending at its current rate of money consumption. As of March 2022, Active Biotech had a liquidity of 38 million kr and no debt. Looking at the last year, the company has burned 53 million crowns. This means it had a cash track of around 9 months as of March 2022. This is a pretty short cash track, indicating that the company needs to either reduce its annual cash consumption or replenish its liquidity. The following image shows how your cash balance has changed over the past few years.
How does Active Biotech’s money consumption change over time?
In our view, Active Biotech still does not produce significant amounts of operating revenue, as it has only recorded kr6.2 million in the past twelve months. Therefore, for the purposes of this analysis, we will focus on how money consumption is monitored. Over the past twelve months, his money consumption has actually increased by 85%. While this increase in spending is undoubtedly set to drive growth, if the trend continues, the company’s cash run will shrink very quickly. Clearly, however, the crucial factor is whether the company will grow its business in the future. So you might want to take a look at how much the company is expected to grow in the next few years.
Can Active Biotech Raise More Money Easily?
Since its money consumption is moving in the wrong direction, Active Biotech shareholders may want to think ahead of when the company might need to raise more money. Issuing new shares or taking on debt are the most common ways for a publicly traded company to raise more funds for its business. One of the main advantages held by publicly traded companies is that they can sell shares to investors to raise cash and finance growth. We can compare a company’s cash consumption with its market capitalization to get an idea of how many new shares a company would have to issue to fund a year’s operations.
Active Biotech has a market capitalization of 229 million kr and burned up to 53 million kr last year, or 23% of the company’s market value. This is not insignificant and if the company were to sell enough shares to finance another year’s growth at the current share price, you would likely see a rather expensive dilution.
Is Active Biotech Cash Burn a Concern?
Active Biotech is not in a great position when it comes to his money consumption situation. While its cash consumption relative to its market cap hasn’t been bad, its cash surge leaves us quite nervous. After reviewing this range of measures, we believe shareholders should be extremely careful about how the company uses its cash, as consuming money makes us uncomfortable. Separately, we have looked at the different risks affecting the company and identified them 5 warning signs for Active Biotech (3 of which make us uncomfortable!) you should know.
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This Simply Wall St article 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 stock and does not take into account your goals or financial situation. Our goal is to provide you with a focused, long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no position in any of the stocks mentioned.