We're Interested To See How OKYO Pharma (LON:OKYO) Uses Its Cash Hoard To Grow

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, OKYO Pharma (LON:OKYO) shareholders have done very well over the last year, with the share price soaring by 320%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for OKYO Pharma shareholders to consider whether its cash burn is concerning. 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 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. Looking at the last year, the company burnt through UK£735k. So it had a cash runway of about 7.8 years from September 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

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 54% 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 Easily Can OKYO Pharma Raise Cash?

While we're comforted by the recent reduction evident from our analysis of OKYO Pharma's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

OKYO Pharma has a market capitalisation of UK£52m and burnt through UK£735k last year, which is 1.4% of the company's market value. 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.

So, Should We Worry About OKYO Pharma's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way OKYO Pharma is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn reduction was very encouraging. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for OKYO Pharma that potential shareholders should take into account before putting money into a stock.

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. 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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