Botanix Pharmaceuticals (ASX:BOT) Will Have To Spend Its Cash Wisely

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?

Given this risk, we thought we'd take a look at whether Botanix Pharmaceuticals (ASX:BOT) shareholders should be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Botanix Pharmaceuticals

Does Botanix Pharmaceuticals 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. In June 2022, Botanix Pharmaceuticals had AU$7.3m in cash, and was debt-free. Looking at the last year, the company burnt through AU$14m. Therefore, from June 2022 it had roughly 6 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Botanix Pharmaceuticals Growing?

It was quite stunning to see that Botanix Pharmaceuticals increased its cash burn by 374% over the last year. That's pretty alarming given that operating revenue dropped 60% over the last year, though the business is likely attempting a strategic pivot. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Botanix Pharmaceuticals is building its business over time.

How Hard Would It Be For Botanix Pharmaceuticals To Raise More Cash For Growth?

Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Botanix Pharmaceuticals could raise 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.

Botanix Pharmaceuticals' cash burn of AU$14m is about 22% of its AU$63m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

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

We must admit that we don't think Botanix Pharmaceuticals is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its increasing cash burn to be downright troublesome. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. On another note, Botanix Pharmaceuticals has 5 warning signs (and 2 which make us uncomfortable) we think you should know about.

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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.