We're A Little Worried About Lytix Biopharma's (OB:LYTIX) Cash Burn Rate

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 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 Lytix Biopharma (OB:LYTIX) shareholders should 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Lytix Biopharma

When Might Lytix Biopharma Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2023, Lytix Biopharma had kr79m in cash, and was debt-free. In the last year, its cash burn was kr95m. So it had a cash runway of approximately 10 months from September 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Is Lytix Biopharma's Cash Burn Changing Over Time?

Whilst it's great to see that Lytix Biopharma has already begun generating revenue from operations, last year it only produced kr4.0m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The skyrocketing cash burn up 151% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Lytix Biopharma Raise Cash?

Since its cash burn is moving in the wrong direction, Lytix Biopharma shareholders may wish to think ahead to when the company may need to raise more 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. 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.

Since it has a market capitalisation of kr238m, Lytix Biopharma's kr95m in cash burn equates to about 40% of its 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 Lytix Biopharma's Cash Burn?

We must admit that we don't think Lytix Biopharma is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash runway acceptable, we can't ignore the fact that we consider its increasing cash burn to be downright troublesome. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Lytix Biopharma (4 make us uncomfortable!) that you should be aware of before investing here.

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.