Yahoo Finance Here's Why We're Watching PYC Therapeutics' (ASX:PYC) Cash Burn Situation
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether PYC Therapeutics (ASX:PYC) shareholders should 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for PYC Therapeutics
Does PYC Therapeutics Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2023, PYC Therapeutics had cash of AU$16m and no debt. Importantly, its cash burn was AU$25m over the trailing twelve months. So it had a cash runway of approximately 8 months from June 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. You can see how its cash balance has changed over time in the image below.
How Is PYC Therapeutics' Cash Burn Changing Over Time?
While PYC Therapeutics did record statutory revenue of AU$16m over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. With the cash burn rate up 12% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can PYC Therapeutics Raise Cash?
Given its cash burn trajectory, PYC Therapeutics shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).
PYC Therapeutics has a market capitalisation of AU$217m and burnt through AU$25m last year, which is 12% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How Risky Is PYC Therapeutics' Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought PYC Therapeutics' cash burn relative to its market cap was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for PYC Therapeutics that investors should know when investing in the stock.
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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.
