We're Hopeful That Arcadia Biosciences (NASDAQ:RKDA) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Arcadia Biosciences (NASDAQ:RKDA) shareholders is whether they should be concerned by its rate of cash burn. 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Arcadia Biosciences

How Long Is Arcadia Biosciences' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2022, Arcadia Biosciences had cash of US$23m and no debt. Importantly, its cash burn was US$18m over the trailing twelve months. So it had a cash runway of approximately 15 months from September 2022. 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. You can see how its cash balance has changed over time in the image below.

How Well Is Arcadia Biosciences Growing?

We reckon the fact that Arcadia Biosciences managed to shrink its cash burn by 32% over the last year is rather encouraging. But the revenue dip of 5.2% in the same period was a bit concerning. On balance, we'd say the company is improving over time. 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 Arcadia Biosciences Raise Cash?

Even though it seems like Arcadia Biosciences is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. 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.

Arcadia Biosciences' cash burn of US$18m is about 7.5% of its US$247m market capitalisation. 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 Arcadia Biosciences' Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Arcadia Biosciences' cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Arcadia Biosciences' situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Arcadia Biosciences that potential shareholders should take into account before putting money into a stock.

Of course Arcadia Biosciences 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.