We're Hopeful That Botanix Pharmaceuticals (ASX:BOT) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Botanix Pharmaceuticals (ASX:BOT) shareholders is whether they should be concerned by its rate of cash burn. 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

When Might Botanix Pharmaceuticals Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Botanix Pharmaceuticals had cash of AU$19m and no debt. Looking at the last year, the company burnt through AU$8.1m. That means it had a cash runway of about 2.4 years as of December 2020. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Well Is Botanix Pharmaceuticals Growing?

Happily, Botanix Pharmaceuticals is travelling in the right direction when it comes to its cash burn, which is down 66% over the last year. Unfortunately, however, operating revenue dropped 9.1% during the same time frame. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. 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?

We are certainly impressed with the progress Botanix Pharmaceuticals has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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).

Botanix Pharmaceuticals' cash burn of AU$8.1m is about 7.3% of its AU$112m 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.

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. For example, we think its cash burn reduction suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Botanix Pharmaceuticals has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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