Here's Why We're Not Too Worried About ARS Pharmaceuticals' (NASDAQ:SPRY) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should ARS Pharmaceuticals (NASDAQ:SPRY) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for ARS Pharmaceuticals

SWOT Analysis for ARS Pharmaceuticals

Does ARS Pharmaceuticals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When ARS Pharmaceuticals last reported its balance sheet in December 2022, it had zero debt and cash worth US$274m. Importantly, its cash burn was US$40m over the trailing twelve months. Therefore, from December 2022 it had 6.8 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Well Is ARS Pharmaceuticals Growing?

Notably, ARS Pharmaceuticals actually ramped up its cash burn very hard and fast in the last year, by 129%, signifying heavy investment in the business. And that is all the more of a concern in light of the fact that operating revenue was actually down by 76% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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.

Can ARS Pharmaceuticals Raise More Cash Easily?

While ARS Pharmaceuticals 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

ARS Pharmaceuticals' cash burn of US$40m is about 9.4% of its US$428m market capitalisation. 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 ARS Pharmaceuticals' Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought ARS Pharmaceuticals' cash runway was relatively promising. 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 ARS Pharmaceuticals' situation. Taking an in-depth view of risks, we've identified 2 warning signs for ARS Pharmaceuticals that you should be aware of before investing.

Of course ARS Pharmaceuticals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.