Is AVROBIO (NASDAQ:AVRO) In A Good Position To Deliver On Growth Plans?




  • In Business
  • 2021-12-04 11:25:10Z
  • By Simply Wall St.
 

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 AVROBIO (NASDAQ:AVRO) shareholders should 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.

Check out our latest analysis for AVROBIO

When Might AVROBIO 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 September 2021, AVROBIO had cash of US$201m and no debt. In the last year, its cash burn was US$104m. Therefore, from September 2021 it had roughly 23 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Is AVROBIO's Cash Burn Changing Over Time?

Because AVROBIO isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 18%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For AVROBIO To Raise More Cash For Growth?

Given its cash burn trajectory, AVROBIO 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. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

AVROBIO's cash burn of US$104m is about 67% of its US$157m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

So, Should We Worry About AVROBIO's Cash Burn?

On this analysis of AVROBIO's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for AVROBIO (2 shouldn't be ignored!) that you should be aware of before investing here.

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.

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.

COMMENTS

More Related News

Estimating The Fair Value Of Tracsis plc (LON:TRCS)
Estimating The Fair Value Of Tracsis plc (LON:TRCS)

Does the January share price for Tracsis plc ( LON:TRCS ) reflect what it's really worth? Today, we will estimate the...

A Look At The Fair Value Of Bioventix PLC (LON:BVXP)
A Look At The Fair Value Of Bioventix PLC (LON:BVXP)

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Bioventix PLC...

We Think Highfield Resources (ASX:HFR) Needs To Drive Business Growth Carefully
We Think Highfield Resources (ASX:HFR) Needs To Drive Business Growth Carefully

Just because a business does not make any money, does not mean that the stock will go down. For example, although...

Here
Here's Why We're Watching Greenstone Resources' (ASX:GSR) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although...

An Intrinsic Calculation For Henry Boot PLC (LON:BOOT) Suggests It
An Intrinsic Calculation For Henry Boot PLC (LON:BOOT) Suggests It's 41% Undervalued

Does the January share price for Henry Boot PLC ( LON:BOOT ) reflect what it's really worth? Today, we will estimate...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Business