Here's Why We're Not Too Worried About AVITA Medical's (ASX:AVH) Cash Burn Situation

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, AVITA Medical (ASX:AVH) shareholders have done very well over the last year, with the share price soaring by 154%. 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 AVITA Medical's cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for AVITA Medical

How Long Is AVITA Medical's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When AVITA Medical last reported its balance sheet in June 2023, it had zero debt and cash worth US$66m. In the last year, its cash burn was US$25m. That means it had a cash runway of about 2.6 years as of June 2023. Importantly, analysts think that AVITA Medical will reach cashflow breakeven in 3 years. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. Depicted below, you can see how its cash holdings have changed over time.

How Well Is AVITA Medical Growing?

Some investors might find it troubling that AVITA Medical is actually increasing its cash burn, which is up 34% in the last year. The good news is that operating revenue increased by 37% in the last year, indicating that the business is gaining some traction. On balance, we'd say the company is improving over time. 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 Easily Can AVITA Medical Raise Cash?

We are certainly impressed with the progress AVITA Medical has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

AVITA Medical has a market capitalisation of US$357m and burnt through US$25m last year, which is 7.1% 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.

So, Should We Worry About AVITA Medical's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way AVITA Medical is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for AVITA Medical that potential shareholders should take into account before putting money into a stock.

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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This article by Simply Wall St 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 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.