Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Achieve Life Sciences (NASDAQ:ACHV) shareholders is whether they should be concerned by its rate of cash burn. 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 fund its growth. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does Achieve Life Sciences Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2019, Achieve Life Sciences had cash of US$7.4m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was US$15m. So it had a cash runway of approximately 6 months from September 2019. That’s a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. You can see how its cash balance has changed over time in the image below.
How Is Achieve Life Sciences’s Cash Burn Changing Over Time?
Achieve Life Sciences didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With the cash burn rate up 43% in the last year, it seems that the company is ratcheting up investment in the business over time. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Achieve Life Sciences To Raise More Cash For Growth?
Given its cash burn trajectory, Achieve Life Sciences shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 to drive 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.
Achieve Life Sciences’s cash burn of US$15m is about 139% of its US$11m market capitalisation. Given just how high that expenditure is, relative to the company’s market value, we think there’s an elevated risk of funding distress, and we would be very nervous about holding the stock.
How Risky Is Achieve Life Sciences’s Cash Burn Situation?
There are no prizes for guessing that we think Achieve Life Sciences’s cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn’t in a good position to keep funding growth. And although we accept its increasing cash burn wasn’t as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. The measures we’ve considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Achieve Life Sciences insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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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