We're Hopeful That Recce Pharmaceuticals (ASX:RCE) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. 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.

So, the natural question for Recce Pharmaceuticals (ASX:RCE) shareholders is whether they should be concerned by its rate of 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Recce Pharmaceuticals

How Long Is Recce Pharmaceuticals' Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Recce Pharmaceuticals last reported its balance sheet in December 2020, it had zero debt and cash worth AU$24m. In the last year, its cash burn was AU$7.7m. That means it had a cash runway of about 3.1 years as of December 2020. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Is Recce Pharmaceuticals' Cash Burn Changing Over Time?

Although Recce Pharmaceuticals reported revenue of AU$690k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. In fact, it ramped its spending strongly over the last year, increasing cash burn by 155%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Recce Pharmaceuticals 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.

How Hard Would It Be For Recce Pharmaceuticals To Raise More Cash For Growth?

Given its cash burn trajectory, Recce Pharmaceuticals 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.

Recce Pharmaceuticals' cash burn of AU$7.7m is about 4.7% of its AU$163m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Recce Pharmaceuticals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Recce Pharmaceuticals is burning through its cash. In particular, we think its cash runway 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. Taking a deeper dive, we've spotted 5 warning signs for Recce Pharmaceuticals you should be aware of, and 2 of them can't be ignored.

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.

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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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