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Just because a business does not make any money, does not mean that the stock will go down. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Aroa Biosurgery (ASX:ARX) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Aroa Biosurgery
Does Aroa Biosurgery Have A Long Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Aroa Biosurgery last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth NZ$22m. Looking at the last year, the company burnt through NZ$11m. Therefore, from September 2024 it had 2.0 years of cash runway. Notably, however, analysts think that Aroa Biosurgery will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Aroa Biosurgery Growing?
It was fairly positive to see that Aroa Biosurgery reduced its cash burn by 27% during the last year. And operating revenue was up by 16% too. On balance, we'd say the company is improving over time. 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.
Can Aroa Biosurgery Raise More Cash Easily?
Even though it seems like Aroa Biosurgery is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Aroa Biosurgery has a market capitalisation of NZ$293m and burnt through NZ$11m last year, which is 3.7% of the company's market value. 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.