Here's Why We're Watching Botanix Pharmaceuticals' (ASX:BOT) Cash Burn Situation

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, Botanix Pharmaceuticals (ASX:BOT) shareholders have done very well over the last year, with the share price soaring by 146%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Botanix Pharmaceuticals' cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

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. When Botanix Pharmaceuticals last reported its balance sheet in June 2023, it had zero debt and cash worth AU$10m. In the last year, its cash burn was AU$19m. So it had a cash runway of approximately 6 months from June 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Botanix Pharmaceuticals Growing?

At first glance it's a bit worrying to see that Botanix Pharmaceuticals actually boosted its cash burn by 36%, year on year. The silver lining is that revenue was up 37%, showing the business is growing at the top line. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Botanix Pharmaceuticals is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Botanix Pharmaceuticals Raise Cash?

Given the trajectory of Botanix Pharmaceuticals' cash burn, many investors will already be thinking about how it might raise more cash in the future. 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 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.

Since it has a market capitalisation of AU$242m, Botanix Pharmaceuticals' AU$19m in cash burn equates to about 7.9% of its market value. 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.

Is Botanix Pharmaceuticals' Cash Burn A Worry?

On this analysis of Botanix Pharmaceuticals' cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Taking a deeper dive, we've spotted 3 warning signs for Botanix Pharmaceuticals you should be aware of, and 1 of them makes us a bit uncomfortable.

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

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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.