Here's Why We're Not Too Worried About PharmAust's (ASX:PAA) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, PharmAust (ASX:PAA) shareholders have done very well over the last year, with the share price soaring by 255%. 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 notwithstanding the buoyant share price, we think it's well worth asking whether PharmAust's 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for PharmAust

When Might PharmAust 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. As at December 2023, PharmAust had cash of AU$5.5m and no debt. In the last year, its cash burn was AU$1.6m. Therefore, from December 2023 it had 3.5 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Well Is PharmAust Growing?

It was quite stunning to see that PharmAust increased its cash burn by 295% over the last year. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 66%. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how PharmAust is building its business over time.

How Easily Can PharmAust Raise Cash?

While PharmAust 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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$140m, PharmAust's AU$1.6m in cash burn equates to about 1.1% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is PharmAust's Cash Burn Situation?

As you can probably tell by now, we're not too worried about PharmAust's cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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. Separately, we looked at different risks affecting the company and spotted 5 warning signs for PharmAust (of which 2 shouldn't be ignored!) you should know about.

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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.