We're Hopeful That Destiny Pharma (LON:DEST) Will Use Its Cash Wisely

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Destiny Pharma (LON:DEST) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Destiny Pharma

How Long Is Destiny Pharma's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Destiny Pharma last reported its balance sheet in June 2020, it had zero debt and cash worth UK£5.6m. In the last year, its cash burn was UK£3.5m. So it had a cash runway of approximately 19 months from June 2020. 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. Depicted below, you can see how its cash holdings have changed over time.

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

Although Destiny Pharma reported revenue of UK£306k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 42% over the last year suggests some degree of prudence. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Destiny Pharma To Raise More Cash For Growth?

While Destiny Pharma is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster 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).

Destiny Pharma's cash burn of UK£3.5m is about 11% of its UK£32m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Destiny Pharma's Cash Burn Situation?

Destiny Pharma appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong cash burn reduction. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Destiny Pharma has 7 warning signs (and 3 which can't be ignored) we think you should know about.

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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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