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

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Botanix Pharmaceuticals (ASX:BOT) has seen its share price rise 168% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Botanix Pharmaceuticals' cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Botanix Pharmaceuticals

Does Botanix Pharmaceuticals Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Botanix Pharmaceuticals last reported its June 2024 balance sheet in September 2024, it had zero debt and cash worth AU$79m. In the last year, its cash burn was AU$26m. Therefore, from June 2024 it had 3.0 years of cash runway. Importantly, though, the one analyst we see covering the stock thinks that Botanix Pharmaceuticals will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Botanix Pharmaceuticals Growing?

Some investors might find it troubling that Botanix Pharmaceuticals is actually increasing its cash burn, which is up 37% in the last year. And we must say we find it concerning that operating revenue dropped 45% over the same period. Taken together, we think these growth metrics are a little worrying. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Botanix Pharmaceuticals Raise More Cash Easily?

Botanix Pharmaceuticals seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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. 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$26m is about 3.8% of its AU$682m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Botanix Pharmaceuticals' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Botanix Pharmaceuticals' cash burn. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its falling revenue is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Botanix Pharmaceuticals that potential shareholders should take into account before putting money into a stock.

Of course Botanix Pharmaceuticals 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 with high insider ownership.

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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.