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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Lyra Therapeutics (NASDAQ:LYRA) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Lyra Therapeutics' 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 September 2021, Lyra Therapeutics had US$58m in cash, and was debt-free. Looking at the last year, the company burnt through US$24m. That means it had a cash runway of about 2.4 years as of September 2021. 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 Is Lyra Therapeutics' Cash Burn Changing Over Time?
In our view, Lyra Therapeutics doesn't yet produce significant amounts of operating revenue, since it reported just US$14k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 19%, 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. 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.
Can Lyra Therapeutics Raise More Cash Easily?
While Lyra Therapeutics does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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. 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.
Lyra Therapeutics' cash burn of US$24m is about 41% of its US$58m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
How Risky Is Lyra Therapeutics' Cash Burn Situation?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Lyra Therapeutics' cash runway was relatively promising. 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 Lyra Therapeutics' situation. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Lyra Therapeutics (of which 2 are a bit concerning!) 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)
What are the risks and opportunities for Lyra Therapeutics?
Revenue is forecast to grow 71.02% per year
Shareholders have been substantially diluted in the past year
Does not have a meaningful market cap ($85M)
Does not have meaningful revenue ($2M)
Currently unprofitable and not forecast to become profitable over the next 3 years
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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.
Lyra Therapeutics, Inc., a clinical-stage therapeutics company, focuses on the development and commercialization of novel integrated drug and delivery solutions for the localized treatment of patients with ear, nose, and throat diseases.
Flawless balance sheet and slightly overvalued.