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, ACADIA Pharmaceuticals (NASDAQ:ACAD) shareholders have done very well over the last year, with the share price soaring by 104%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So notwithstanding the buoyant share price, we think it’s well worth asking whether ACADIA Pharmaceuticals’s cash burn is too risky 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is ACADIA Pharmaceuticals’s 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. As at March 2020, ACADIA Pharmaceuticals had cash of US$651m and no debt. In the last year, its cash burn was US$137m. So it had a cash runway of about 4.7 years from March 2020. Notably, however, analysts think that ACADIA Pharmaceuticals will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
How Well Is ACADIA Pharmaceuticals Growing?
We reckon the fact that ACADIA Pharmaceuticals managed to shrink its cash burn by 27% over the last year is rather encouraging. And arguably the operating revenue growth of 54% was even more impressive. It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For ACADIA Pharmaceuticals To Raise More Cash For Growth?
There’s no doubt ACADIA Pharmaceuticals seems to be in a fairly good position, when it comes to managing its cash burn, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).
ACADIA Pharmaceuticals has a market capitalisation of US$8.6b and burnt through US$137m last year, which is 1.6% of the company’s market value. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
Is ACADIA Pharmaceuticals’s Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about ACADIA Pharmaceuticals’s cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn’t quite as impressive, it was still a positive. One real positive is that analysts are forecasting that the company will reach breakeven. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. An in-depth examination of risks revealed 2 warning signs for ACADIA Pharmaceuticals that readers should think about before committing capital to this stock.
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)
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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.
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