Advertisement
Canada markets closed
  • S&P/TSX

    21,639.10
    -59.00 (-0.27%)
     
  • S&P 500

    5,431.60
    -2.14 (-0.04%)
     
  • DOW

    38,589.16
    -57.94 (-0.15%)
     
  • CAD/USD

    0.7281
    +0.0002 (+0.03%)
     
  • CRUDE OIL

    78.49
    +0.04 (+0.05%)
     
  • Bitcoin CAD

    91,364.08
    +483.26 (+0.53%)
     
  • CMC Crypto 200

    1,381.94
    -35.93 (-2.53%)
     
  • GOLD FUTURES

    2,348.40
    -0.70 (-0.03%)
     
  • RUSSELL 2000

    2,006.16
    -32.75 (-1.61%)
     
  • 10-Yr Bond

    4.2130
    -0.0250 (-0.59%)
     
  • NASDAQ

    17,688.88
    +21.28 (+0.12%)
     
  • VOLATILITY

    12.66
    +0.72 (+6.03%)
     
  • FTSE

    8,146.86
    -16.81 (-0.21%)
     
  • NIKKEI 225

    38,814.56
    +94.06 (+0.24%)
     
  • CAD/EUR

    0.6799
    +0.0025 (+0.37%)
     

Is ARCA biopharma (NASDAQ:ABIO) In A Good Position To Deliver On Growth Plans?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should ARCA biopharma (NASDAQ:ABIO) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for ARCA biopharma

When Might ARCA biopharma Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at March 2022, ARCA biopharma had cash of US$49m and no debt. Importantly, its cash burn was US$18m over the trailing twelve months. Therefore, from March 2022 it had 2.7 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Is ARCA biopharma's Cash Burn Changing Over Time?

Because ARCA biopharma isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 58%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Admittedly, we're a bit cautious of ARCA biopharma due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can ARCA biopharma Raise Cash?

Given its cash burn trajectory, ARCA biopharma 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. 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).

ADVERTISEMENT

ARCA biopharma has a market capitalisation of US$36m and burnt through US$18m last year, which is 50% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

How Risky Is ARCA biopharma's Cash Burn Situation?

On this analysis of ARCA biopharma's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about ARCA biopharma's situation. Separately, we looked at different risks affecting the company and spotted 2 warning signs for ARCA biopharma (of which 1 doesn't sit too well with us!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here