We're Not Very Worried About Adicet Bio's (NASDAQ:ACET) Cash Burn Rate

By
Simply Wall St
Published
March 18, 2022
NasdaqGM:ACET
Source: Shutterstock

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Adicet Bio (NASDAQ:ACET) shareholders 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Adicet Bio

How Long Is Adicet Bio's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2021, Adicet Bio had cash of US$278m and no debt. In the last year, its cash burn was US$64m. That means it had a cash runway of about 4.3 years as of December 2021. Notably, analysts forecast that Adicet Bio will break even (at a free cash flow level) in about 5 years. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqGM:ACET Debt to Equity History March 18th 2022

How Well Is Adicet Bio Growing?

Adicet Bio actually ramped up its cash burn by a whopping 51% in the last year, which shows it is boosting investment in the business. As if that's not bad enough, the operating revenue also dropped by 46%, making us very wary indeed. Considering both these metrics, we're a little concerned about how the company is developing. 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 Adicet Bio To Raise More Cash For Growth?

Even though it seems like Adicet Bio is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Adicet Bio has a market capitalisation of US$648m and burnt through US$64m last year, which is 9.9% 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 Adicet Bio's Cash Burn?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Adicet Bio's cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. Taking an in-depth view of risks, we've identified 3 warning signs for Adicet Bio that you should be aware of before investing.

Of course Adicet Bio 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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