Will Unicycive Therapeutics (NASDAQ:UNCY) Spend Its Cash Wisely?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Unicycive Therapeutics (NASDAQ:UNCY) shareholders have done very well over the last year, with the share price soaring by 150%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Unicycive Therapeutics' cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Unicycive Therapeutics

Does Unicycive Therapeutics Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2023, Unicycive Therapeutics had cash of US$14m and no debt. In the last year, its cash burn was US$20m. So it had a cash runway of approximately 9 months from September 2023. Importantly, analysts think that Unicycive Therapeutics will reach cashflow breakeven in around 19 months. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Is Unicycive Therapeutics' Cash Burn Changing Over Time?

Whilst it's great to see that Unicycive Therapeutics has already begun generating revenue from operations, last year it only produced US$675k, 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. Over the last year its cash burn actually increased by a very significant 81%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. 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 Hard Would It Be For Unicycive Therapeutics To Raise More Cash For Growth?

Since its cash burn is moving in the wrong direction, Unicycive Therapeutics shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).

Unicycive Therapeutics' cash burn of US$20m is about 49% of its US$40m 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 Unicycive Therapeutics' Cash Burn?

Unicycive Therapeutics is not in a great position when it comes to its cash burn situation. While its cash runway wasn't too bad, its cash burn relative to its market cap does leave us rather nervous. 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. Summing up, we think the Unicycive Therapeutics' cash burn is a risk, based on the factors we mentioned in this article. On another note, Unicycive Therapeutics has 5 warning signs (and 3 which are potentially serious) we think you should know about.

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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.