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

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

So should Avidity Biosciences (NASDAQ:RNA) shareholders 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Avidity Biosciences

When Might Avidity Biosciences Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Avidity Biosciences last reported its balance sheet in December 2022, it had zero debt and cash worth US$611m. Importantly, its cash burn was US$139m over the trailing twelve months. So it had a cash runway of about 4.4 years from December 2022. Importantly, though, analysts think that Avidity Biosciences will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Avidity Biosciences Growing?

At first glance it's a bit worrying to see that Avidity Biosciences actually boosted its cash burn by 41%, year on year. To be fair, given that fact it's hardly inspiring to see that the operating revenue was flat year on year. 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 Avidity Biosciences To Raise More Cash For Growth?

Even though it seems like Avidity Biosciences is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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. 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 has a market capitalisation of US$952m and burnt through US$139m last year, which is 15% of the company's market value. 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.

So, Should We Worry About Avidity Biosciences' Cash Burn?

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. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking an in-depth view of risks, we've identified 2 warning signs for Avidity Biosciences that you should be aware of before investing.

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. 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.