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We can readily understand why investors are attracted to unprofitable companies. 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. 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 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Cyclopharm
When Might Cyclopharm Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Cyclopharm last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth AU$29m. Looking at the last year, the company burnt through AU$13m. That means it had a cash runway of about 2.2 years as of June 2024. 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?
Cyclopharm boosted investment sharply in the last year, with cash burn ramping by 68%. While that's concerning on it's own, the fact that operating revenue was actually down 10% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. 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.
Can Cyclopharm Raise More Cash Easily?
Even though it seems like Cyclopharm 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. 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).