We keep an eye on Avenue Therapeutics’ cash consumption rate (NASDAQ: ATXI)
It is easy to understand why investors are attracted to unprofitable companies. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mineral discovery. That said, unprofitable businesses are risky because they could potentially spend all of their money and end up in distress.
So the natural question for Therapeutic Avenue (NASDAQ: ATXI) is whether they should be concerned about its rate of cash consumption. For the purposes of this article, we’ll define cash consumption as the amount of cash the business spends each year to finance its growth (also known as negative free cash flow). The first step is to compare its cash consumption with its cash reserves, to give us its “cash flow track”.
When could Avenue Therapeutics run out of money?
A cash flow trail is defined as the time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. As of September 2020, Avenue Therapeutics had US $ 4.3 million in cash and no debt. In the past year, his cash consumption was $ 8.4 million. Therefore, as of September 2020, he had around 6 months of cash flow trail. To be frank, this kind of short track puts us on edge, because it indicates that the company needs to significantly reduce its consumption of cash, or else raise cash imminently. The image below shows how her cash balance has evolved over the past few years.
How does Avenue Therapeutics’ money consumption change over time?
Avenue Therapeutics has not recorded any revenue over the past year, indicating that it is a start-up company that continues to grow its business. Nonetheless, we can still examine its cash-consuming trajectory as part of our assessment of its cash-consuming situation. The 63% reduction in its cash consumption over the past twelve months could be interpreted as a sign that management is worried about running out of cash. If the past is always worth studying, it is the future that matters most. Then you might want to take a look at how much the company is expected to grow over the next few years.
How easily can Avenue Therapeutics raise funds?
There is no doubt that Avenue Therapeutics’ rapid reduction in money consumption brings some comfort, but even if this is only hypothetical, it is still worth wondering how easily it could raise more money. money to finance future growth. Businesses can raise capital through debt or equity. Typically, a company itself will sell new stocks to raise funds and drive growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Avenue Therapeutics has a market capitalization of US $ 102 million and spent US $ 8.4 million last year, or 8.2% of the market value of the company. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.
So, should we be worried about Avenue Therapeutics’ money consumption?
Based on this analysis of Avenue Therapeutics’ cash burn, we think that its reduction in cash burn was reassuring, while its cash trail worries us a little. We don’t think its cash consumption is particularly problematic, but after looking at the range of factors in this article, we think shareholders should watch how it evolves over time. By diving deeper, we spotted 2 warning signs for Avenue Therapeutics you need to be aware, and one of them is a bit of a concern.
Of course, you might find a fantastic investment looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analysts’ forecasts)
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