Here's Why We're Watching FSD Pharma's (CSE:HUGE) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for FSD Pharma (CSE:HUGE) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for FSD Pharma

When Might FSD Pharma Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, FSD Pharma had cash of US$43m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$22m. So it had a cash runway of approximately 23 months from June 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Is FSD Pharma's Cash Burn Changing Over Time?

In our view, FSD Pharma doesn't yet produce significant amounts of operating revenue, since it reported just US$193k in the last twelve months. 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. Over the last year its cash burn actually increased by a very significant 51%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. FSD Pharma makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can FSD Pharma Raise Cash?

While FSD Pharma does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Since it has a market capitalisation of US$60m, FSD Pharma's US$22m in cash burn equates to about 38% 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.

How Risky Is FSD Pharma's Cash Burn Situation?

On this analysis of FSD Pharma's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Taking a deeper dive, we've spotted 4 warning signs for FSD Pharma you should be aware of, and 3 of them shouldn't be ignored.

Of course FSD Pharma 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. 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.
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