Here's Why We're Watching IRLAB Therapeutics' (STO:IRLAB A) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 IRLAB Therapeutics (STO:IRLAB A) 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.

See our latest analysis for IRLAB Therapeutics

When Might IRLAB Therapeutics Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2023, IRLAB Therapeutics had kr119m in cash, and was debt-free. In the last year, its cash burn was kr169m. So it had a cash runway of approximately 8 months from September 2023. Importantly, analysts think that IRLAB Therapeutics will reach cashflow breakeven in around 20 months. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Well Is IRLAB Therapeutics Growing?

Some investors might find it troubling that IRLAB Therapeutics is actually increasing its cash burn, which is up 24% in the last year. The fact that operating revenue was down 69% only gives us further disquiet. Considering these two factors together makes us nervous about the direction the company seems to be heading. 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.

Can IRLAB Therapeutics Raise More Cash Easily?

IRLAB Therapeutics revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. 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).

IRLAB Therapeutics' cash burn of kr169m is about 29% of its kr581m market capitalisation. 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.

How Risky Is IRLAB Therapeutics' Cash Burn Situation?

We must admit that we don't think IRLAB Therapeutics is in a very strong position, when it comes to its cash burn. While its increasing cash burn wasn't too bad, its falling revenue does leave us rather nervous. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 5 warning signs for IRLAB Therapeutics that investors should know when investing in the stock.

Of course IRLAB Therapeutics 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. 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.