We're Hopeful That Avecho Biotechnology (ASX:AVE) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. Indeed, Avecho Biotechnology (ASX:AVE) stock is up 167% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Avecho Biotechnology'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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Avecho Biotechnology

How Long Is Avecho Biotechnology's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2020, Avecho Biotechnology had cash of AU$1.9m and no debt. 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. Depicted below, you can see how its cash holdings have changed over time.

How Hard Would It Be For Avecho Biotechnology To Raise More Cash For Growth?

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 and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Avecho Biotechnology has a market capitalisation of AU$37m and burnt through AU$1.4m last year, which is 3.9% 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?

Because Avecho Biotechnology is an early stage company, we don't have a great deal of data on which to form an opinion of its 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 4 warning signs for Avecho Biotechnology (of which 2 are significant!) you should know about.

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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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