Here's Why We're Not At All Concerned With Botanix Pharmaceuticals' (ASX:BOT) Cash Burn Situation

By
Simply Wall St
Published
May 10, 2022
ASX:BOT
Source: Shutterstock

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Botanix Pharmaceuticals (ASX:BOT) 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Botanix Pharmaceuticals

Does Botanix Pharmaceuticals Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Botanix Pharmaceuticals last reported its balance sheet in December 2021, it had zero debt and cash worth AU$17m. Importantly, its cash burn was AU$2.2m over the trailing twelve months. Therefore, from December 2021 it had 7.5 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
ASX:BOT Debt to Equity History May 10th 2022

How Is Botanix Pharmaceuticals' Cash Burn Changing Over Time?

In our view, Botanix Pharmaceuticals doesn't yet produce significant amounts of operating revenue, since it reported just AU$95.0 in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Notably, its cash burn was actually down by 73% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Botanix Pharmaceuticals makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Botanix Pharmaceuticals Raise Cash?

There's no doubt Botanix Pharmaceuticals' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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 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).

Botanix Pharmaceuticals' cash burn of AU$2.2m is about 3.3% of its AU$68m 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.

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

It may already be apparent to you that we're relatively comfortable with the way Botanix Pharmaceuticals is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn relative to its market cap was also very reassuring. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Botanix Pharmaceuticals (2 are potentially serious!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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