Companies Like PsyBio Therapeutics (CVE:PSYB) Can Afford To Invest In Growth

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether PsyBio Therapeutics (CVE:PSYB) shareholders should be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for PsyBio Therapeutics

When Might PsyBio Therapeutics Run Out Of Money?

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 PsyBio Therapeutics last reported its balance sheet in March 2021, it had zero debt and cash worth CA$13m. Looking at the last year, the company burnt through CA$2.0m. Therefore, from March 2021 it had 6.5 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 Easily Can PsyBio Therapeutics Raise Cash?

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 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.

PsyBio Therapeutics has a market capitalisation of CA$42m and burnt through CA$2.0m last year, which is 4.7% of the company's market value. 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.

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

Given it's an early stage company, we don't have a lot of data with which to judge PsyBio Therapeutics' cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash runway gave us comfort. Overall, we think its cash burn seems perfectly reasonable, and we are not concerned by it. Taking an in-depth view of risks, we've identified 3 warning signs for PsyBio Therapeutics that you should be aware of before investing.

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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