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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So, the natural question for AbCellera Biologics (NASDAQ:ABCL) 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’.
View our latest analysis for AbCellera Biologics
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at September 2024, AbCellera Biologics had cash of US$643m and no debt. Looking at the last year, the company burnt through US$198m. Therefore, from September 2024 it had 3.2 years of cash runway. There’s no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
Notably, AbCellera Biologics actually ramped up its cash burn very hard and fast in the last year, by 190%, signifying heavy investment in the business. While that’s concerning on it’s own, the fact that operating revenue was actually down 35% over the same period makes us positively tremulous. In light of the above-mentioned, we’re pretty wary of the trajectory the company seems to be on. 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.
Even though it seems like AbCellera Biologics is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.
