We Think OKYO Pharma (LON:OKYO) Can Easily Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. For example, OKYO Pharma (LON:OKYO) shareholders have done very well over the last year, with the share price soaring by 560%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether OKYO Pharma's cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for OKYO Pharma

When Might OKYO Pharma Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When OKYO Pharma last reported its balance sheet in September 2020, it had zero debt and cash worth UK£5.8m. Importantly, its cash burn was UK£735k over the trailing twelve months. So it had a cash runway of about 7.8 years from September 2020. 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 Is OKYO Pharma's Cash Burn Changing Over Time?

OKYO Pharma didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Even though it doesn't get us excited, the 52% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of OKYO Pharma due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

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

There's no doubt OKYO Pharma's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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. 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.

OKYO Pharma's cash burn of UK£735k is about 1.3% of its UK£56m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is OKYO Pharma's Cash Burn Situation?

As you can probably tell by now, we're not too worried about OKYO Pharma's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn reduction was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking an in-depth view of risks, we've identified 3 warning signs for OKYO Pharma that you should be aware of before investing.

Of course OKYO 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. 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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