Stock Analysis

Is ARCA biopharma (NASDAQ:ABIO) In A Good Position To Deliver On Growth Plans?

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NasdaqCM:ABIO
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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, 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether ARCA biopharma (NASDAQ:ABIO) shareholders should 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for ARCA biopharma

How Long Is ARCA biopharma's Cash Runway?

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 ARCA biopharma last reported its balance sheet in June 2022, it had zero debt and cash worth US$46m. In the last year, its cash burn was US$17m. That means it had a cash runway of about 2.8 years as of June 2022. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
NasdaqCM:ABIO Debt to Equity History September 24th 2022

How Is ARCA biopharma's Cash Burn Changing Over Time?

ARCA biopharma didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 20%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of ARCA biopharma due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can ARCA biopharma Raise Cash?

Given its cash burn trajectory, ARCA biopharma shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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. 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.

ARCA biopharma's cash burn of US$17m is about 55% of its US$31m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

Is ARCA biopharma's Cash Burn A Worry?

On this analysis of ARCA biopharma's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. 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 ARCA biopharma's situation. Taking a deeper dive, we've spotted 3 warning signs for ARCA biopharma you should be aware of, and 2 of them make us uncomfortable.

Of course ARCA biopharma 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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About NasdaqCM:ABIO

ARCA biopharma

ARCA biopharma, Inc., a clinical-stage biopharmaceutical company, develops and commercializes genetically targeted therapies for cardiovascular diseases.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth0
Past Performance0
Financial Health6
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet and overvalued.