Here's Why Aravive (NASDAQ:ARAV) Must Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. 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 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 Aravive (NASDAQ:ARAV) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Aravive

When Might Aravive Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Aravive last reported its balance sheet in December 2022, it had zero debt and cash worth US$54m. Importantly, its cash burn was US$65m over the trailing twelve months. Therefore, from December 2022 it had roughly 10 months of cash runway. Importantly, analysts think that Aravive will reach cashflow breakeven in 5 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Aravive Growing?

Notably, Aravive actually ramped up its cash burn very hard and fast in the last year, by 102%, signifying heavy investment in the business. On the bright side, at least operating revenue was up 23% over the same period, giving some cause for hope. Considering both these factors, we're not particularly excited by its growth profile. 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 Aravive Raise More Cash Easily?

Given the trajectory of Aravive's cash burn, many investors will already be thinking about how it might 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. 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.

Since it has a market capitalisation of US$95m, Aravive's US$65m in cash burn equates to about 69% of its market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

Is Aravive's Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Aravive's revenue growth was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Aravive (2 are potentially serious!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.