Yahoo Finance Here's Why We're Not Too Worried About Amarin's (NASDAQ:AMRN) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Amarin (NASDAQ:AMRN) shareholders is whether they should be concerned by its rate of cash burn. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Amarin
How Long Is Amarin's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, Amarin had US$309m in cash, and was debt-free. Looking at the last year, the company burnt through US$181m. That means it had a cash runway of around 21 months as of December 2022. Notably, however, analysts think that Amarin will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Amarin Growing?
Notably, Amarin actually ramped up its cash burn very hard and fast in the last year, by 172%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 37%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Amarin To Raise More Cash For Growth?
Since Amarin can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
Amarin has a market capitalisation of US$552m and burnt through US$181m last year, which is 33% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
How Risky Is Amarin's Cash Burn Situation?
On this analysis of Amarin's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Amarin that investors should know when investing in the stock.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.
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