Companies Like BioArctic (STO:BIOA B) Can Afford To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. By way of example, BioArctic (STO:BIOA B) has seen its share price rise 161% 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 BioArctic shareholders to consider whether its cash burn is concerning. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for BioArctic

When Might BioArctic Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, BioArctic had kr805m in cash, and was debt-free. In the last year, its cash burn was kr44m. That means it had a cash runway of very many years as of December 2022. Importantly, though, analysts think that BioArctic will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.

How Well Is BioArctic Growing?

Happily, BioArctic is travelling in the right direction when it comes to its cash burn, which is down 69% over the last year. But its revenue is better yet, flying higher than Elon Musk and his rocket, with growth of 886% in the last year. Overall, we'd say its growth is rather impressive. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

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

There's no doubt BioArctic 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. 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.

BioArctic's cash burn of kr44m is about 0.2% of its kr23b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is BioArctic's Cash Burn Situation?

As you can probably tell by now, we're not too worried about BioArctic's cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking an in-depth view of risks, we've identified 1 warning sign for BioArctic that you should be aware of before investing.

Of course BioArctic 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. 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.