We're Not Very Worried About Cyclopharm's (ASX:CYC) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. For example, Cyclopharm (ASX:CYC) shareholders have done very well over the last year, with the share price soaring by 142%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Cyclopharm'scash 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Cyclopharm

How Long Is Cyclopharm's 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. When Cyclopharm last reported its balance sheet in June 2020, it had zero debt and cash worth AU$8.1m. Looking at the last year, the company burnt through AU$5.5m. So it had a cash runway of approximately 18 months from June 2020. 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?

One thing for shareholders to keep front in mind is that Cyclopharm increased its cash burn by 419% in the last twelve months. On top of that, the fact that operating revenue was basically flat over the same period compounds the concern. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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?

Since Cyclopharm can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Cyclopharm has a market capitalisation of AU$212m and burnt through AU$5.5m last year, which is 2.6% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Cyclopharm's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Cyclopharm is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking an in-depth view of risks, we've identified 2 warning signs for Cyclopharm that you should be aware of before investing.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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This article by Simply Wall St is general in nature. 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.
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