We're Not Very Worried About Botanix Pharmaceuticals' (ASX:BOT) Cash Burn Rate

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 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

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 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Botanix Pharmaceuticals

How Long Is Botanix Pharmaceuticals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, Botanix Pharmaceuticals had AU$22m in cash, and was debt-free. Looking at the last year, the company burnt through AU$3.0m. Therefore, from June 2021 it had 7.2 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. The image below shows how its cash balance has been changing over the last few years.

How Well Is Botanix Pharmaceuticals Growing?

Botanix Pharmaceuticals managed to reduce its cash burn by 83% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 9.1% during the same time frame. We think it is growing rather well, upon reflection. 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 Easily Can Botanix Pharmaceuticals Raise Cash?

While Botanix Pharmaceuticals seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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$3.0m is about 4.8% of its AU$62m 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.

Is Botanix Pharmaceuticals' Cash Burn A Worry?

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 its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking a deeper dive, we've spotted 3 warning signs for Botanix Pharmaceuticals you should be aware of, and 1 of them shouldn't be ignored.

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.