We can readily understand why investors are attracted to unprofitable companies. For example, Avidity Biosciences (NASDAQ:RNA) shareholders have done very well over the last year, with the share price soaring by 196%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Avidity Biosciences' cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

When Might Avidity Biosciences 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. When Avidity Biosciences last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth US$1.6b. Looking at the last year, the company burnt through US$189m. Therefore, from September 2024 it had 8.4 years of cash runway. Importantly, though, analysts think that Avidity Biosciences will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Avidity Biosciences Growing?

At first glance it's a bit worrying to see that Avidity Biosciences actually boosted its cash burn by 5.3%, year on 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 Hard Would It Be For Avidity Biosciences To Raise More Cash For Growth?

Even though it seems like Avidity Biosciences 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. 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' cash burn of US$189m is about 5.4% of its US$3.5b 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.

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. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. One real positive is that analysts are forecasting that the company will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Avidity Biosciences (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course Avidity Biosciences may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.