Here's Why We're Not Too Worried About Ascletis Pharma's (HKG:1672) Cash Burn Situation

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Ascletis Pharma (HKG:1672) shareholders be worried about its cash burn? 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.

See our latest analysis for Ascletis Pharma

When Might Ascletis Pharma Run Out Of Money?

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. When Ascletis Pharma last reported its balance sheet in December 2021, it had zero debt and cash worth CN¥2.5b. Importantly, its cash burn was CN¥154m over the trailing twelve months. That means it had a cash runway of very many years as of December 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

How Well Is Ascletis Pharma Growing?

Some investors might find it troubling that Ascletis Pharma is actually increasing its cash burn, which is up 24% in the last year. Given that its operating revenue increased 120% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. 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 Ascletis Pharma Raise Cash?

There's no doubt Ascletis Pharma 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Ascletis Pharma's cash burn of CN¥154m is about 4.0% of its CN¥3.8b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Ascletis Pharma's Cash Burn?

As you can probably tell by now, we're not too worried about Ascletis Pharma's cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Ascletis Pharma 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 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. 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.