Amylyx Pharmaceuticals (NASDAQ:AMLX) Is In A Strong Position To Grow Its Business

We can readily understand why investors are attracted to unprofitable companies. For example, Amylyx Pharmaceuticals (NASDAQ:AMLX) shareholders have done very well over the last year, with the share price soaring by 189%. 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 Amylyx Pharmaceuticals' cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Amylyx Pharmaceuticals

SWOT Analysis for Amylyx Pharmaceuticals

Does Amylyx Pharmaceuticals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Amylyx Pharmaceuticals had cash of US$347m and no debt. Importantly, its cash burn was US$182m over the trailing twelve months. That means it had a cash runway of around 23 months as of December 2022. Notably, however, analysts think that Amylyx Pharmaceuticals will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.

How Is Amylyx Pharmaceuticals' Cash Burn Changing Over Time?

In our view, Amylyx Pharmaceuticals doesn't yet produce significant amounts of operating revenue, since it reported just US$22m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 143% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Amylyx Pharmaceuticals To Raise More Cash For Growth?

Given its cash burn trajectory, Amylyx Pharmaceuticals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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. 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.

Amylyx Pharmaceuticals' cash burn of US$182m is about 8.7% of its US$2.1b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Amylyx Pharmaceuticals' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Amylyx Pharmaceuticals is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. An in-depth examination of risks revealed 1 warning sign for Amylyx Pharmaceuticals that readers should think about before committing capital to this stock.

Of course Amylyx Pharmaceuticals 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.