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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, aTyr Pharma (NASDAQ:ATYR) shareholders have done very well over the last year, with the share price soaring by 128%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So notwithstanding the buoyant share price, we think it's well worth asking whether aTyr Pharma's cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for aTyr Pharma
Does aTyr Pharma Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2024, aTyr Pharma had cash of US$66m and no debt. Importantly, its cash burn was US$67m over the trailing twelve months. So it had a cash runway of approximately 12 months from September 2024. Importantly, analysts think that aTyr Pharma will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Is aTyr Pharma's Cash Burn Changing Over Time?
In our view, aTyr Pharma doesn't yet produce significant amounts of operating revenue, since it reported just US$235k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. During the last twelve months, its cash burn actually ramped up 77%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. 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.
How Hard Would It Be For aTyr Pharma To Raise More Cash For Growth?
Given its cash burn trajectory, aTyr Pharma shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.