As the kr245m market cap A1M Pharma AB (publ) (STO:A1M) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that A1M Pharma is spending more money than it earns, it will need to fund its expenses via external sources of capital. A1M Pharma may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
See our latest analysis for A1M Pharma
What is cash burn?
Currently, A1M Pharma has kr52m in cash holdings and producing negative free cash flow of -kr65.2m. The riskiest factor facing investors of A1M Pharma is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the exciting, fast-growing biotech industry often face this problem, and A1M Pharma is no exception. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.
When will A1M Pharma need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much A1M Pharma has to spend each year in order to keep its business running.
Free cash outflows declined by 14% over the past year, which could be an indication of A1M Pharma putting the brakes on ramping up high growth. Given the level of cash left in the bank, if A1M Pharma maintained its cash burn rate of -kr65.2m, it could still run out of cash within the next few of months. Although this is a relatively simplistic calculation, and A1M Pharma may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the A1M Pharma operation is, and when things may have to change.
Next Steps:
The risks involved in investing in loss-making A1M Pharma means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. This is only a rough assessment of financial health, and A1M likely also has company-specific issues impacting its cash management decisions. You should continue to research A1M Pharma to get a better picture of the company by looking at: