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We can readily understand why investors are attracted to unprofitable companies. For example, Rezolute (NASDAQ:RZLT) shareholders have done very well over the last year, with the share price soaring by 637%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So notwithstanding the buoyant share price, we think it's well worth asking whether Rezolute's cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for Rezolute
When Might Rezolute Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2024, Rezolute had US$108m in cash, and was debt-free. Looking at the last year, the company burnt through US$63m. So it had a cash runway of approximately 21 months from September 2024. Notably, analysts forecast that Rezolute will break even (at a free cash flow level) in about 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Is Rezolute's Cash Burn Changing Over Time?
Because Rezolute isn't currently generating revenue, we consider it an early-stage 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. With the cash burn rate up 32% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 Rezolute Raise More Cash Easily?
While Rezolute does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.