Stock Analysis

We're Keeping An Eye On Cyclerion Therapeutics' (NASDAQ:CYCN) Cash Burn Rate

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NasdaqCM:CYCN
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We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Cyclerion Therapeutics (NASDAQ:CYCN) shareholders be worried about its cash burn? 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Cyclerion Therapeutics

Does Cyclerion Therapeutics Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Cyclerion Therapeutics last reported its balance sheet in December 2021, it had zero debt and cash worth US$54m. In the last year, its cash burn was US$37m. That means it had a cash runway of around 18 months as of December 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqGS:CYCN Debt to Equity History March 3rd 2022

How Well Is Cyclerion Therapeutics Growing?

We reckon the fact that Cyclerion Therapeutics managed to shrink its cash burn by 51% over the last year is rather encouraging. And arguably the operating revenue growth of 72% was even more impressive. We think it is growing rather well, upon reflection. 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 Cyclerion Therapeutics Raise Cash?

There's no doubt Cyclerion Therapeutics seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund 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 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).

Cyclerion Therapeutics' cash burn of US$37m is about 68% of its US$54m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

How Risky Is Cyclerion Therapeutics' Cash Burn Situation?

On this analysis of Cyclerion Therapeutics' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 7 warning signs for Cyclerion Therapeutics (of which 2 are potentially serious!) you should know about.

Of course Cyclerion 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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