We're Keeping An Eye On Avenue Therapeutics' (NASDAQ:ATXI) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Avenue Therapeutics (NASDAQ:ATXI) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Avenue Therapeutics

How Long Is Avenue Therapeutics' 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 Avenue Therapeutics last reported its balance sheet in September 2020, it had zero debt and cash worth US$4.3m. Looking at the last year, the company burnt through US$8.4m. So it had a cash runway of approximately 6 months from September 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

How Is Avenue Therapeutics' Cash Burn Changing Over Time?

Because Avenue Therapeutics isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. We'd venture that the 63% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. While the past is always worth studying, it is the future that matters most of all. 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 Avenue Therapeutics To Raise More Cash For Growth?

There's no doubt Avenue Therapeutics' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of US$105m, Avenue Therapeutics' US$8.4m in cash burn equates to about 8.0% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Avenue Therapeutics' Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Avenue Therapeutics' cash burn reduction was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Taking a deeper dive, we've spotted 2 warning signs for Avenue Therapeutics you should be aware of, and 1 of them can't be ignored.

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