We're Not Worried About Neuren Pharmaceuticals' (ASX:NEU) Cash Burn

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Neuren Pharmaceuticals (ASX:NEU) shareholders have done very well over the last year, with the share price soaring by 164%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Neuren Pharmaceuticals' cash burn is too risky. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Neuren Pharmaceuticals

How Long Is Neuren Pharmaceuticals' 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 Neuren Pharmaceuticals last reported its balance sheet in June 2021, it had zero debt and cash worth AU$18m. Importantly, its cash burn was AU$9.1m over the trailing twelve months. That means it had a cash runway of about 2.0 years as of June 2021. Notably, however, analysts think that Neuren Pharmaceuticals will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Is Neuren Pharmaceuticals' Cash Burn Changing Over Time?

Whilst it's great to see that Neuren Pharmaceuticals has already begun generating revenue from operations, last year it only produced AU$717k, so we don't think it is generating significant revenue, at this point. 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. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Neuren Pharmaceuticals Raise Cash?

While its cash burn is only increasing slightly, Neuren Pharmaceuticals shareholders should still consider the potential need for further cash, down the track. 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 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).

Neuren Pharmaceuticals' cash burn of AU$9.1m is about 1.8% of its AU$491m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Neuren Pharmaceuticals' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Neuren Pharmaceuticals' cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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. Taking a deeper dive, we've spotted 3 warning signs for Neuren Pharmaceuticals you should be aware of, and 1 of them is a bit concerning.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.