It’s easy to see why investors are attracted to unprofitable companies. For example, even though software-as-a-service company Salesforce.com lost money for years while growing recurring earnings, if you had held the stock since 2005, you would have done well. But the harsh reality is that many unprofitable companies burn through all their money and go bankrupt.
Given this risk, we thought it would be worth considering whether AC Immune (NASDAQ:ACIU) shareholders should be worried about its cash burn. For the purposes of this article, we define “cash burn” as the amount of cash a company uses to fund its growth each year (also known as negative free cash flow). We first compare its cash burn to its cash reserves to calculate its runway.
You can calculate a company’s cash flow by dividing the amount of cash it has by its cash burn rate. At December 2023, AC Immune had CHF 103 million in cash and no debt. Last year, cash losses amounted to CHF 61 million. So it has about 20 months of cash runway, starting in December 2023. But it’s worth noting that analysts believe AC Immune will break even (at a free cash flow level) before then. In this case, his cash streak will never be exhausted. You can see how its cash balance has changed over time in the image below.
Overall, we think AC Immune has reduced its cash burn by 18% over the last 12 months, which is moderately positive. But what’s really impressive is the 276% increase in operating profit. On reflection, we think it’s growing quite well. However, it is clear that the key factor is whether the company can grow its business in the future. So it makes sense to take a look at what our analysts are forecasting for the companies.
AC Immune appears to be in a pretty good position from a cash burn perspective, but given that it could easily raise more capital if it wanted, we still think it’s worth it. Generally speaking, listed companies can raise new cash by issuing shares or raising debt. One of the main advantages of public companies is that they can sell shares to investors to raise cash and finance growth. By looking at a company’s cash burn relative to its market capitalization, we can get an idea of how diluted shareholders will be if the company needs to raise enough cash to cover next year’s cash burn.
AC Immune has a market capitalization of CHF 240 million and last year it consumed CHF 61 million, representing 25% of the company’s market capitalization. This is significant: if the company has to sell enough shares to fund next year’s growth at the current share price, you could face some pretty costly dilution.
As you can probably clearly see, we’re relatively happy with how AC Immune is burning money. For example, we believe that revenue growth is a sign that the company is on the right track. While the company’s cash burn is modest relative to its market capitalization, the other factors mentioned in this article more than offset the weakness in this metric. Analysts predict that the company will soon break even, which is obviously very positive. Taking into account all the measures described in this article, our concern is not the cash burn rate; The company appears well positioned to meet medium-term spending needs. It’s important for readers to be aware of the risks that could affect a company’s performance, and we’ve picked out 3 warning signs for AC Immune that investors should be aware of when investing in the stock.
Of course, you can look elsewhere for great investments. So take a peek at this free list of interesting companies and this list of growing stocks based on analyst forecasts.
Any feedback on this article? Follow content? Contact us directly. You can also write a letter to the editor at Simplywallst.com. This article, written by Simply Wall St, is of a general nature. We use only objective methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Wall Street simply does not have a position in any of the stocks mentioned.
Post time: Apr-26-2024