We Think Eliem Therapeutics (NASDAQ:ELYM) Needs To Drive Business Growth Carefully

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Eliem Therapeutics (NASDAQ:ELYM) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Eliem Therapeutics

SWOT Analysis for Eliem Therapeutics

Does Eliem 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 2023, Eliem Therapeutics had cash of US$109m and no debt. Looking at the last year, the company burnt through US$42m. So it had a cash runway of about 2.6 years from March 2023. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Is Eliem Therapeutics' Cash Burn Changing Over Time?

Because Eliem Therapeutics isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 4.1%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Eliem Therapeutics Raise Cash?

Since its cash burn is increasing (albeit only slightly), Eliem Therapeutics shareholders should still be mindful of the possibility it will require more cash in the future. 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. 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).

Since it has a market capitalisation of US$63m, Eliem Therapeutics' US$42m in cash burn equates to about 66% of its market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

So, Should We Worry About Eliem Therapeutics' Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Eliem Therapeutics' cash runway was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Eliem Therapeutics (2 are a bit unpleasant!) 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 companies insiders are buying, 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.