Here's Why We're A Bit Worried About Xilio Therapeutics' (NASDAQ:XLO) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Xilio Therapeutics (NASDAQ:XLO) shareholders should be worried about its 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.

Check out our latest analysis for Xilio Therapeutics

When Might Xilio Therapeutics Run Out Of Money?

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 March 2024, Xilio Therapeutics had cash of US$34m and no debt. Importantly, its cash burn was US$54m over the trailing twelve months. So it had a cash runway of approximately 8 months from March 2024. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Is Xilio Therapeutics' Cash Burn Changing Over Time?

Because Xilio Therapeutics 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. Given the length of the cash runway, we'd interpret the 34% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. 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 Xilio Therapeutics Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Xilio Therapeutics to raise more cash in the future. Companies can raise capital through either debt or equity. 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.

Xilio Therapeutics has a market capitalisation of US$35m and burnt through US$54m last year, which is 153% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

How Risky Is Xilio Therapeutics' Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Xilio Therapeutics' cash burn. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash burn relative to its market cap, its cash burn reduction is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Separately, we looked at different risks affecting the company and spotted 7 warning signs for Xilio Therapeutics (of which 3 are concerning!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com