We're Not Very Worried About PYC Therapeutics' (ASX:PYC) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. For example, PYC Therapeutics (ASX:PYC) shareholders have done very well over the last year, with the share price soaring by 175%. 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.

In light of its strong share price run, we think now is a good time to investigate how risky PYC Therapeutics' cash burn is. 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.

Check out our latest analysis for PYC Therapeutics

How Long Is PYC Therapeutics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, PYC Therapeutics had AU$57m in cash, and was debt-free. Looking at the last year, the company burnt through AU$10m. Therefore, from December 2020 it had 5.5 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 Is PYC Therapeutics' Cash Burn Changing Over Time?

Although PYC Therapeutics reported revenue of AU$121k last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 65%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. PYC Therapeutics makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can PYC Therapeutics Raise More Cash Easily?

Given its cash burn trajectory, PYC Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

PYC Therapeutics' cash burn of AU$10m is about 2.0% of its AU$523m 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.

So, Should We Worry About PYC Therapeutics' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way PYC Therapeutics is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Separately, we looked at different risks affecting the company and spotted 3 warning signs for PYC Therapeutics (of which 2 are a bit concerning!) you should know about.

Of course PYC Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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