Here's Why We're Not At All Concerned With Pasithea Therapeutics' (NASDAQ:KTTA) Cash Burn Situation

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Pasithea Therapeutics (NASDAQ:KTTA) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Pasithea Therapeutics

Does Pasithea 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. In December 2021, Pasithea Therapeutics had US$53m in cash, and was debt-free. In the last year, its cash burn was US$3.2m. So it had a very long cash runway of many years from December 2021. Importantly, though, analysts think that Pasithea Therapeutics will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

How Is Pasithea Therapeutics' Cash Burn Changing Over Time?

Whilst it's great to see that Pasithea Therapeutics has already begun generating revenue from operations, last year it only produced US$15k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Remarkably, it actually increased its cash burn by 5,406% in the last year. That kind of sharp increase in spending may pay off, but is generally considered quite risky. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Pasithea Therapeutics Raise Cash?

Given its cash burn trajectory, Pasithea Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Pasithea Therapeutics' cash burn of US$3.2m is about 11% of its US$28m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Pasithea Therapeutics' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Pasithea Therapeutics is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, Pasithea Therapeutics has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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