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We can readily understand why investors are attracted to unprofitable companies. By way of example, Argenica Therapeutics (ASX:AGN) has seen its share price rise 105% over the last year, delighting many shareholders. 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 Argenica Therapeutics' cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Argenica Therapeutics
How Long Is Argenica Therapeutics' Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Argenica Therapeutics last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth AU$16m. Looking at the last year, the company burnt through AU$5.1m. So it had a cash runway of about 3.1 years from June 2024. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.
How Is Argenica Therapeutics' Cash Burn Changing Over Time?
While Argenica Therapeutics did record statutory revenue of AU$2.8m over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 53%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Argenica Therapeutics makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Argenica Therapeutics Raise More Cash Easily?
Given its cash burn trajectory, Argenica Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.