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. By way of example, Avecho Biotechnology (ASX:AVE) has seen its share price rise 780% over the last year, delighting many shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given its strong share price performance, we think it's worthwhile for Avecho Biotechnology shareholders to consider whether its cash burn is concerning. 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. That means it had a cash runway of around 16 months as of 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 Hard Would It Be For Avecho Biotechnology To Raise More Cash For Growth?

Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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's cash burn of AU$1.4m is about 3.3% of its AU$44m market capitalisation. 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.

So, Should We Worry About Avecho Biotechnology's Cash Burn?

Given it's an early stage company, we don't have a lot of data with which to judge Avecho Biotechnology's cash burn. Having said that, we can say that its cash burn relative to its market cap was a real positive. 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 make us uncomfortable!) you should know about.

Of course Avecho Biotechnology may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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