We're Keeping An Eye On Celyad Oncology's (EBR:CYAD) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Celyad Oncology (EBR:CYAD) shareholders is whether they should be concerned by its rate of cash burn. 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Celyad Oncology

How Long Is Celyad Oncology's 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. As at June 2020, Celyad Oncology had cash of €27m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was €27m. That means it had a cash runway of around 12 months as of June 2020. 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. You can see how its cash balance has changed over time in the image below.

How Is Celyad Oncology's Cash Burn Changing Over Time?

In the last year, Celyad Oncology did book revenue of €11k, but its revenue from operations was less, at just €11k. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. As it happens, the company's cash burn reduced by 12% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Celyad Oncology Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Celyad Oncology to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of €92m, Celyad Oncology's €27m in cash burn equates to about 30% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Celyad Oncology's Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Celyad Oncology's cash burn reduction was relatively promising. Summing up, we think the Celyad Oncology's cash burn is a risk, based on the factors we mentioned in this article. On another note, Celyad Oncology has 5 warning signs (and 3 which are a bit unpleasant) we think you should know about.

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