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 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, the natural question for Ayala Pharmaceuticals (NASDAQ:AYLA) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
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. When Ayala Pharmaceuticals last reported its balance sheet in March 2022, it had zero debt and cash worth US$27m. In the last year, its cash burn was US$39m. That means it had a cash runway of around 8 months as of March 2022. Importantly, analysts think that Ayala Pharmaceuticals will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Ayala Pharmaceuticals Growing?
At first glance it's a bit worrying to see that Ayala Pharmaceuticals actually boosted its cash burn by 26%, year on year. Also concerning, operating revenue was actually down by 19% in that time. 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Ayala Pharmaceuticals Raise Cash?
Ayala Pharmaceuticals revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of US$22m, Ayala Pharmaceuticals' US$39m in cash burn equates to about 179% of its market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
Is Ayala Pharmaceuticals' Cash Burn A Worry?
There are no prizes for guessing that we think Ayala Pharmaceuticals' cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. While not as bad as its cash burn relative to its market cap, its increasing cash burn is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. One real positive is that analysts are forecasting that the company will reach breakeven. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Ayala Pharmaceuticals (of which 2 are a bit concerning!) you should know about.
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.
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