There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Cyclopharm (ASX:CYC) shareholders 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). Let’s start with an examination of the business’ cash, relative to its cash burn.
See our latest analysis for Cyclopharm
Does Cyclopharm 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. As at December 2023, Cyclopharm had cash of AU$12m and no debt. Importantly, its cash burn was AU$7.7m over the trailing twelve months. So it had a cash runway of approximately 18 months from December 2023. Importantly, though, the one analyst we see covering the stock thinks that Cyclopharm 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.
How Well Is Cyclopharm Growing?
On balance, we think it’s mildly positive that Cyclopharm trimmed its cash burn by 6.2% over the last twelve months. And operating revenue was up by 13% too. On balance, we’d say the company is improving over time. 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 Cyclopharm To Raise More Cash For Growth?
Cyclopharm 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Cyclopharm has a market capitalisation of AU$169m and burnt through AU$7.7m last year, which is 4.5% 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.
So, Should We Worry About Cyclopharm’s Cash Burn?
As you can probably tell by now, we’re not too worried about Cyclopharm’s cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn’t too bad! It’s clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. After considering a range of factors in this article, we’re pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. When you don’t have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Cyclopharm insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
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.
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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.
