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

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Avenue Therapeutics (NASDAQ:ATXI) shareholders is whether they should be concerned by its rate of 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). 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

When Might Avenue Therapeutics Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2020, Avenue Therapeutics had cash of US$4.3m and no debt. In the last year, its cash burn was US$8.4m. Therefore, from September 2020 it had roughly 6 months of cash runway. 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?

Avenue Therapeutics didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The 63% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Avenue Therapeutics Raise Cash?

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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Avenue Therapeutics has a market capitalisation of US$102m and burnt through US$8.4m last year, which is 8.2% 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 Avenue Therapeutics' Cash Burn?

On this analysis of Avenue Therapeutics' cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. 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 is a bit concerning.

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