Here's Why We're Not Too Worried About Ascletis Pharma's (HKG:1672) 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, Ascletis Pharma (HKG:1672) shareholders have done very well over the last year, with the share price soaring by 156%. 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.

So notwithstanding the buoyant share price, we think it's well worth asking whether Ascletis Pharma's cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Ascletis Pharma

When Might Ascletis Pharma Run Out Of Money?

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. As at June 2024, Ascletis Pharma had cash of CN¥2.1b and no debt. Importantly, its cash burn was CN¥299m over the trailing twelve months. That means it had a cash runway of about 7.0 years as of June 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Well Is Ascletis Pharma Growing?

Ascletis Pharma boosted investment sharply in the last year, with cash burn ramping by 73%. That's bad enough, but the operating revenue drop of 84% points to a period of uncertainty and, quite potentially, heightened risk for holders." Considering these two factors together makes us nervous about the direction the company seems to be heading. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Ascletis Pharma Raise More Cash Easily?

While Ascletis Pharma seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster 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. 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.

Ascletis Pharma has a market capitalisation of CN¥4.3b and burnt through CN¥299m last year, which is 6.9% of the company's market value. 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?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Ascletis Pharma's cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Ascletis Pharma that potential shareholders should take into account before putting money into a stock.

Of course Ascletis Pharma 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 with high insider ownership.

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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.