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We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Aroa Biosurgery (ASX:ARX) shareholders should 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Aroa Biosurgery
When Might Aroa Biosurgery Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2024, Aroa Biosurgery had cash of NZ$30m and no debt. Importantly, its cash burn was NZ$14m over the trailing twelve months. That means it had a cash runway of about 2.1 years as of March 2024. 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. The image below shows how its cash balance has been changing over the last few years.
How Well Is Aroa Biosurgery Growing?
Some investors might find it troubling that Aroa Biosurgery is actually increasing its cash burn, which is up 26% in the last year. The revenue growth of 9.0% gives a ray of hope, at the very least. In light of the data above, we're fairly sanguine about the business growth trajectory. 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 Easily Can Aroa Biosurgery Raise Cash?
Aroa Biosurgery seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Aroa Biosurgery's cash burn of NZ$14m is about 6.3% of its NZ$227m market capitalisation. 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.