Here's Why We're Not Too Worried About Avidity Biosciences' (NASDAQ:RNA) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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.

Given this risk, we thought we'd take a look at whether Avidity Biosciences (NASDAQ:RNA) shareholders should be worried about its 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.

Our analysis indicates that RNA is potentially overvalued!

How Long Is Avidity Biosciences' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2022, Avidity Biosciences had US$406m in cash, and was debt-free. In the last year, its cash burn was US$127m. That means it had a cash runway of about 3.2 years as of September 2022. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Avidity Biosciences Growing?

Avidity Biosciences boosted investment sharply in the last year, with cash burn ramping by 51%. While that's concerning on it's own, the fact that operating revenue was actually down 14% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. 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 Avidity Biosciences Raise Cash?

While Avidity Biosciences 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 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.

Avidity Biosciences' cash burn of US$127m is about 18% of its US$691m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Avidity Biosciences' Cash Burn A Worry?

On this analysis of Avidity Biosciences' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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 Avidity Biosciences' situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Avidity Biosciences (1 is a bit concerning!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.