Here's Why We're Not Too Worried About MIRA Pharmaceuticals' (NASDAQ:MIRA) Cash Burn Situation

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

Sun, Jan 5, 2025, 6:16 AM 4 min read

Just because a business does not make any money, does not mean that the stock will go down. 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.

So, the natural question for MIRA Pharmaceuticals (NASDAQ:MIRA) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for MIRA Pharmaceuticals

How Long Is MIRA Pharmaceuticals' Cash Runway?

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. In September 2024, MIRA Pharmaceuticals had US$4.1m in cash, and was debt-free. Looking at the last year, the company burnt through US$4.8m. Therefore, from September 2024 it had roughly 10 months of cash runway. Importantly, analysts think that MIRA Pharmaceuticals will reach cashflow breakeven in around 15 months. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis — NasdaqCM:MIRA Debt to Equity History January 5th 2025

How Is MIRA Pharmaceuticals' Cash Burn Changing Over Time?

MIRA Pharmaceuticals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 7.1%, which suggests that management are increasing investment in future growth, but not too quickly. 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. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can MIRA Pharmaceuticals Raise More Cash Easily?

Since its cash burn is increasing (albeit only slightly), MIRA Pharmaceuticals shareholders should still be mindful of the possibility it will require more 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. 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).

MIRA Pharmaceuticals' cash burn of US$4.8m is about 23% of its US$21m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About MIRA Pharmaceuticals' Cash Burn?

MIRA Pharmaceuticals is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its increasing cash burn acceptable, we can't ignore the fact that we consider its cash runway to be downright troublesome. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about MIRA Pharmaceuticals' situation. On another note, MIRA Pharmaceuticals has 6 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Of course MIRA Pharmaceuticals 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.