We Think IO Biotech (NASDAQ:IOBT) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

Given this risk, we thought we'd take a look at whether IO Biotech (NASDAQ:IOBT) shareholders should be worried about its 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for IO Biotech

How Long Is IO Biotech's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2023, IO Biotech had cash of US$166m and no debt. Importantly, its cash burn was US$62m over the trailing twelve months. So it had a cash runway of about 2.7 years from September 2023. Notably, analysts forecast that IO Biotech will break even (at a free cash flow level) in about 5 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

How Is IO Biotech's Cash Burn Changing Over Time?

IO Biotech didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn dropping by 7.3% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. 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 IO Biotech Raise Cash?

While IO Biotech is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

IO Biotech's cash burn of US$62m is about 58% of its US$107m market capitalisation. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About IO Biotech's Cash Burn?

On this analysis of IO Biotech's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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 IO Biotech's situation. Taking a deeper dive, we've spotted 4 warning signs for IO Biotech you should be aware of, and 2 of them are concerning.

Of course IO Biotech 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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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.