We Think Cyclopharm (ASX:CYC) Can Afford To Drive Business Growth

By
Simply Wall St
Published
October 22, 2021
ASX:CYC
Source: Shutterstock

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. 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? 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'.

Check out our latest analysis for Cyclopharm

Does Cyclopharm Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2021, Cyclopharm had cash of AU$32m and no debt. Importantly, its cash burn was AU$6.8m over the trailing twelve months. That means it had a cash runway of about 4.6 years as of June 2021. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:CYC Debt to Equity History October 22nd 2021

How Well Is Cyclopharm Growing?

At first glance it's a bit worrying to see that Cyclopharm actually boosted its cash burn by 23%, year on year. The good news is that operating revenue increased by 29% in the last year, indicating that the business is gaining some traction. On balance, we'd say the company is improving over time. 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?

There's no doubt Cyclopharm seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. 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.

Cyclopharm's cash burn of AU$6.8m is about 3.5% of its AU$195m market capitalisation. 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 Cyclopharm's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Cyclopharm's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Cyclopharm (of which 1 shouldn't be ignored!) you should know about.

Of course Cyclopharm 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 that insiders are buying.

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