We're Hopeful That Avidity Biosciences (NASDAQ:RNA) Will Use Its Cash Wisely

editorial-team@simplywallst.com (Simply Wall St)

Wed, Jan 29, 2025, 8:40 AM 4 min read

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, Avidity Biosciences (NASDAQ:RNA) shareholders have done very well over the last year, with the share price soaring by 172%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for Avidity Biosciences shareholders to consider whether its cash burn is concerning. 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Avidity Biosciences

Does Avidity Biosciences Have A Long Cash Runway?

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. When Avidity Biosciences last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth US$1.6b. In the last year, its cash burn was US$189m. That means it had a cash runway of about 8.4 years as of September 2024. Importantly, though, analysts think that Avidity Biosciences will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis — NasdaqGM:RNA Debt to Equity History January 29th 2025

How Well Is Avidity Biosciences Growing?

Some investors might find it troubling that Avidity Biosciences is actually increasing its cash burn, which is up 5.3% in the last year. In light of that, the flat year on year operating leverage is a bit off-putting. In light of the data above, we're fairly sanguine about the business growth trajectory. 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 Easily Can Avidity Biosciences Raise Cash?

Avidity Biosciences seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Avidity Biosciences has a market capitalisation of US$3.6b and burnt through US$189m last year, which is 5.2% of the company's market value. 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.

Is Avidity Biosciences' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Avidity Biosciences is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Avidity Biosciences (1 is a bit concerning!) that you should be aware of before investing here.

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

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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.