Stock Analysis

Is Amarin (NASDAQ:AMRN) In A Good Position To Deliver On Growth Plans?

  •  Updated
NasdaqGM:AMRN
Source: Shutterstock

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

So, the natural question for Amarin (NASDAQ:AMRN) shareholders is whether they should be concerned by its rate of 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 Amarin

Does Amarin Have A Long 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. When Amarin last reported its balance sheet in September 2022, it had zero debt and cash worth US$304m. Looking at the last year, the company burnt through US$210m. So it had a cash runway of approximately 17 months from September 2022. Importantly, analysts think that Amarin will reach cashflow breakeven in 2 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqGM:AMRN Debt to Equity History November 11th 2022

How Well Is Amarin Growing?

Notably, Amarin actually ramped up its cash burn very hard and fast in the last year, by 174%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 30%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Amarin Raise More Cash Easily?

Amarin revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. 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. 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).

Amarin's cash burn of US$210m is about 40% of its US$525m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Amarin's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Amarin's cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Summing up, we think the Amarin's cash burn is a risk, based on the factors we mentioned in this article. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Amarin that potential shareholders should take into account before putting money into a stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

Valuation is complex, but we're helping make it simple.

Find out whether Amarin is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis