Here's Why We're Watching Exscientia's (NASDAQ:EXAI) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should Exscientia (NASDAQ:EXAI) shareholders 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Exscientia

How Long Is Exscientia's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at March 2024, Exscientia had cash of UK£330m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was UK£122m. Therefore, from March 2024 it had 2.7 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Well Is Exscientia Growing?

At first glance it's a bit worrying to see that Exscientia actually boosted its cash burn by 2.8%, year on year. And we must say we find it concerning that operating revenue dropped 25% over the same period. Considering both these metrics, we're a little concerned about how the company is developing. 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 Exscientia Raise Cash?

Even though it seems like Exscientia is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).

Exscientia's cash burn of UK£122m is about 23% of its UK£526m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Exscientia's Cash Burn?

On this analysis of Exscientia's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Exscientia's situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Exscientia (of which 1 can't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.

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