We can readily understand why investors are attracted to unprofitable companies. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Cyclerion Therapeutics Have A Long Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at March 2022, Cyclerion Therapeutics had cash of US$41m and no debt. In the last year, its cash burn was US$35m. Therefore, from March 2022 it had roughly 14 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.
How Well Is Cyclerion Therapeutics Growing?
It was fairly positive to see that Cyclerion Therapeutics reduced its cash burn by 40% during the last year. But it was the operating revenue growth of 242% that really shone. It seems to be growing nicely. 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 Cyclerion Therapeutics To Raise More Cash For Growth?
While Cyclerion Therapeutics seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Cyclerion Therapeutics' cash burn of US$35m is about 70% of its US$50m 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. Summing up, we think the Cyclerion Therapeutics' cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 6 warning signs for Cyclerion Therapeutics you should be aware of, and 3 of them make us uncomfortable.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
What are the risks and opportunities for Cyclerion Therapeutics?
Earnings have grown 17.8% per year over the past 5 years
Has less than 1 year of cash runway
Highly volatile share price over the past 3 months
Does not have a meaningful market cap ($29M)
Does not have meaningful revenue ($2M)
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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.
Cyclerion Therapeutics, Inc., a clinical-stage biopharmaceutical company, engages in the discovering, development, and commercialization of medicines for serious central nervous system (CNS) diseases.
Adequate balance sheet with weak fundamentals.