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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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Cykel AI (LON:CYK) shareholders is whether they should be concerned by its rate of 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.
See our latest analysis for Cykel AI
How Long Is Cykel AI's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Cykel AI last reported its December 2023 balance sheet in May 2024, it had zero debt and cash worth UK£1.4m. Looking at the last year, the company burnt through UK£2.0m. So it had a cash runway of approximately 8 months from December 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
Can Cykel AI Raise More Cash Easily?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Cykel AI has a market capitalisation of UK£27m and burnt through UK£2.0m last year, which is 7.4% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
Is Cykel AI's Cash Burn A Worry?
Because Cykel AI is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. Having said that, we can say that its cash burn relative to its market cap was a real positive. Even though we don't think shareholders should be alarmed by its cash burn, we do think they should be keeping a close eye on it. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Cykel AI (of which 2 shouldn't be ignored!) you should know about.