We're Interested To See How ACADIA Pharmaceuticals (NASDAQ:ACAD) Uses Its Cash Hoard To Grow

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

Given this risk, we thought we'd take a look at whether ACADIA Pharmaceuticals (NASDAQ:ACAD) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for ACADIA Pharmaceuticals

How Long Is ACADIA Pharmaceuticals' 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. As at December 2023, ACADIA Pharmaceuticals had cash of US$439m and no debt. Looking at the last year, the company burnt through US$23m. So it had a very long cash runway of many years from December 2023. Importantly, though, analysts think that ACADIA Pharmaceuticals will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is ACADIA Pharmaceuticals Growing?

Happily, ACADIA Pharmaceuticals is travelling in the right direction when it comes to its cash burn, which is down 80% over the last year. Pleasingly, this was achieved with the help of a 40% boost to revenue. Overall, we'd say its growth is rather impressive. 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 Hard Would It Be For ACADIA Pharmaceuticals To Raise More Cash For Growth?

We are certainly impressed with the progress ACADIA Pharmaceuticals has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

ACADIA Pharmaceuticals has a market capitalisation of US$2.9b and burnt through US$23m last year, which is 0.8% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is ACADIA Pharmaceuticals' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way ACADIA Pharmaceuticals is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its revenue growth was also very reassuring. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what ACADIA Pharmaceuticals' CEO gets paid each year.

Of course ACADIA Pharmaceuticals 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.