Here's Why We're Not Too Worried About MIRA Pharmaceuticals' (NASDAQ:MIRA) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should MIRA Pharmaceuticals (NASDAQ:MIRA) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for MIRA Pharmaceuticals

How Long Is MIRA Pharmaceuticals' 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 September 2024, MIRA Pharmaceuticals had cash of US$4.1m and no debt. Looking at the last year, the company burnt through US$4.8m. Therefore, from September 2024 it had roughly 10 months of cash runway. Notably, analysts forecast that MIRA Pharmaceuticals will break even (at a free cash flow level) in about 15 months. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. The image below shows how its cash balance has been changing over the last few years.

How Is MIRA Pharmaceuticals' Cash Burn Changing Over Time?

Because MIRA Pharmaceuticals 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. With the cash burn rate up 7.1% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 MIRA Pharmaceuticals Raise Cash?

Since its cash burn is increasing (albeit only slightly), MIRA Pharmaceuticals 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. 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.

MIRA Pharmaceuticals has a market capitalisation of US$25m and burnt through US$4.8m last year, which is 19% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is MIRA Pharmaceuticals' Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought MIRA Pharmaceuticals' cash burn relative to its market cap was relatively promising. 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. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 6 warning signs for MIRA Pharmaceuticals you should be aware of, and 3 of them are a bit unpleasant.

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.