Companies Like PsyBio Therapeutics (CVE:PSYB) Are In A Position To Invest In Growth

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should PsyBio Therapeutics (CVE:PSYB) shareholders be worried about its 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. 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 PsyBio Therapeutics

How Long Is PsyBio Therapeutics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When PsyBio Therapeutics last reported its balance sheet in June 2021, it had zero debt and cash worth CA$9.7m. Looking at the last year, the company burnt through CA$4.6m. So it had a cash runway of about 2.1 years from June 2021. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Hard Would It Be For PsyBio Therapeutics To Raise More Cash For Growth?

Companies can raise capital through either debt or equity. 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 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).

PsyBio Therapeutics has a market capitalisation of CA$41m and burnt through CA$4.6m last year, which is 11% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is PsyBio Therapeutics' Cash Burn Situation?

Because PsyBio Therapeutics is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. Having said that, we can say that its cash runway was a real positive. To put it simply, we think its cash burn situation is totally fine given it is still developing its business. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for PsyBio Therapeutics (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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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