Even if a business loses money, shareholders have the potential to make money if they buy a good business at the right price. For example, even though the software-as-a-service business Salesforce.com has been losing money for years while growing recurring revenue, if you’ve held the stock since 2005, you’ve really done well. Still, only a fool would ignore the risk of a loss-making company burning through cash too quickly.
So, the natural question Halo Biosciences (NASDAQ:AURA) Should shareholders be concerned about its cash burn rate. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount a company uses each year to fund its growth. First, we’ll determine its cash runway by comparing its cash burn to cash reserves.
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When will Aura Biosciences run out of money?
A company’s cash runway is calculated by dividing its cash reserves by its cash burn. As of June 2022, Aura Biosciences had $122 million in cash and no debt. Looking back at last year, the company burned through $49 million. That means it has a cash runway of about 2.5 years as of June 2022. It can be said that this is a prudent and reasonable runway length. The chart below shows how its cash balance has changed over the past few years.
How has Aura Biosciences’ cash burn changed over time?
Aura Biosciences didn’t record any revenue last year, suggesting it’s an early-stage company that’s still growing its business. So, while we can’t understand growth through sales, we can understand how spending is trending over time by looking at changes in cash burn. The skyrocketing cash burned 112% year-on-year, which undoubtedly tested our nerves. Generally, this spending growth rate won’t last long before it causes balance sheet weakness. Clearly, however, the key factor is whether the company will grow its business in the future. For this reason, it makes sense to look at our analysts’ forecasts for the company.
Can Aura Biosciences easily raise more cash?
Given its cash burn trajectory, shareholders of Aura Biosciences may want to consider how easy it is to raise more cash, despite its solid cash runway. Issuing new stock or taking on debt are the most common ways for public companies to raise more money for their business. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it must issue to keep the company afloat for another year (at the same burn rate).
With its market cap of $530 million, Aura Biosciences’ $49 million cash burn equates to about 9.2% of its market cap. That’s a low percentage, so we think the company will be able to raise more cash to support growth with a little dilution, or even simply borrow some money.
How risky is Aura Biosciences burning cash?
While its increasing cash burn makes us a little nervous, we have to mention that we think Aura Biosciences’ cash runway is relatively promising. Based on the factors mentioned in this article, we believe its cash burn is something shareholders should be concerned about, but we don’t think they should be concerned.On the other hand, Aura Biosciences has 4 warning signs (2 more could be serious) We think you should know.
If you want to check out another company with better fundamentals, don’t miss it free An interesting list of companies that have high ROE and low debt or this list of stocks all predict growth.
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This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.
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