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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we’d take a look at whether Atomera (NASDAQ:ATOM) shareholders should be worried about its 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
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How Long Is Atomera’s Cash Runway?
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 2023, Atomera had cash of US$20m and no debt. Looking at the last year, the company burnt through US$15m. Therefore, from September 2023 it had roughly 17 months of cash runway. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.
How Is Atomera’s Cash Burn Changing Over Time?
In our view, Atomera doesn’t yet produce significant amounts of operating revenue, since it reported just US$5.0k in the last twelve months. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. With the cash burn rate up 15% in the last year, it seems that the company is ratcheting up investment in the business over time. 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Atomera Raise Cash?
Given its cash burn trajectory, Atomera shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).
Atomera’s cash burn of US$15m is about 8.0% of its US$182m market capitalisation. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Atomera’s Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Atomera’s cash burn relative to its market cap was relatively promising. 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 Atomera’s situation. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Atomera (of which 1 is concerning!) you should know about.
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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.
