Will PsyBio Therapeutics (CVE:PSYB) Spend Its Cash Wisely?

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should PsyBio Therapeutics (CVE:PSYB) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View 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. In September 2021, PsyBio Therapeutics had CA$8.0m in cash, and was debt-free. Looking at the last year, the company burnt through CA$6.5m. Therefore, from September 2021 it had roughly 15 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Easily Can PsyBio Therapeutics Raise Cash?

Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

PsyBio Therapeutics has a market capitalisation of CA$28m and burnt through CA$6.5m last year, which is 23% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

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. But generally speaking, we can say that early stage companies like PsyBio Therapeutics are generally higher risk than well established businesses. Even though we don't think shareholders should be alarmed by its cash burn, we do think they should be keeping a close eye on it. Separately, we looked at different risks affecting the company and spotted 5 warning signs for PsyBio Therapeutics (of which 1 shouldn't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.