Here's Why We're Watching Arvinas' (NASDAQ:ARVN) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. 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 Arvinas (NASDAQ:ARVN) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Arvinas

How Long Is Arvinas' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2024, Arvinas had cash of US$1.2b and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$356m. That means it had a cash runway of about 3.3 years as of March 2024. Importantly, analysts think that Arvinas will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Well Is Arvinas Growing?

At first glance it's a bit worrying to see that Arvinas actually boosted its cash burn by 14%, year on year. And we must say we find it concerning that operating revenue dropped 48% over the same period. Taken together, we think these growth metrics are a little worrying. 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 Arvinas To Raise More Cash For Growth?

While Arvinas seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel 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. 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).

Arvinas has a market capitalisation of US$1.7b and burnt through US$356m last year, which is 21% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Arvinas' Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Arvinas' cash runway was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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 Arvinas' situation. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Arvinas that potential shareholders should take into account before putting money into a stock.

Of course Arvinas 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 with high insider ownership.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com