We Think Ayala Pharmaceuticals (NASDAQ:AYLA) Needs To Drive Business Growth Carefully

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, 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Ayala Pharmaceuticals (NASDAQ:AYLA) 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.

See our latest analysis for Ayala Pharmaceuticals

When Might Ayala Pharmaceuticals 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 March 2021, Ayala Pharmaceuticals had cash of US$56m and no debt. Importantly, its cash burn was US$31m over the trailing twelve months. Therefore, from March 2021 it had roughly 22 months of cash runway. Importantly, analysts think that Ayala Pharmaceuticals 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 Ayala Pharmaceuticals Growing?

Ayala Pharmaceuticals boosted investment sharply in the last year, with cash burn ramping by 63%. While operating revenue was up over the same period, the 20% gain gives us scant comfort. Considering both these factors, we're not particularly excited by its growth profile. 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 Ayala Pharmaceuticals Raise Cash?

Even though it seems like Ayala Pharmaceuticals is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Ayala Pharmaceuticals has a market capitalisation of US$120m and burnt through US$31m last year, which is 26% of the company's market value. 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.

Is Ayala Pharmaceuticals' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Ayala Pharmaceuticals' cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. An in-depth examination of risks revealed 4 warning signs for Ayala Pharmaceuticals that readers should think about before committing capital to this stock.

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. 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.
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