We Think Processa Pharmaceuticals (NASDAQ:PCSA) Needs To Drive Business Growth Carefully

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Processa Pharmaceuticals (NASDAQ:PCSA) 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.

View our latest analysis for Processa Pharmaceuticals

Does Processa Pharmaceuticals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Processa Pharmaceuticals last reported its balance sheet in September 2023, it had zero debt and cash worth US$6.9m. In the last year, its cash burn was US$8.4m. Therefore, from September 2023 it had roughly 10 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Is Processa Pharmaceuticals' Cash Burn Changing Over Time?

Processa Pharmaceuticals 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. As it happens, the company's cash burn reduced by 14% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Processa Pharmaceuticals Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Processa Pharmaceuticals to raise more cash in the future. 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).

Processa Pharmaceuticals has a market capitalisation of US$21m and burnt through US$8.4m last year, which is 41% of the company's market value. 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.

Is Processa Pharmaceuticals' Cash Burn A Worry?

On this analysis of Processa Pharmaceuticals' cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Processa Pharmaceuticals (of which 4 are potentially serious!) you should know about.

Of course Processa Pharmaceuticals 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.