Will Botanix Pharmaceuticals (ASX:BOT) Spend Its Cash Wisely?

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. By way of example, Botanix Pharmaceuticals (ASX:BOT) has seen its share price rise 105% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Botanix Pharmaceuticals shareholders to consider whether its cash burn is concerning. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Botanix Pharmaceuticals

When Might Botanix Pharmaceuticals Run Out Of Money?

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 December 2023 balance sheet in February 2024, it had zero debt and cash worth AU$18m. Importantly, its cash burn was AU$27m over the trailing twelve months. So it had a cash runway of approximately 8 months from December 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. 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 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$437k 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. Over the last year its cash burn actually increased by 32%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of Botanix Pharmaceuticals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Botanix Pharmaceuticals Raise Cash?

Since its cash burn is moving in the wrong direction, Botanix Pharmaceuticals shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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).

Since it has a market capitalisation of AU$323m, Botanix Pharmaceuticals' AU$27m in cash burn equates to about 8.3% of its market value. 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?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Botanix Pharmaceuticals' cash burn relative to its market cap was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Botanix Pharmaceuticals (of which 1 is significant!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.