U.S. Markets close in 41 mins

When Will Bicycle Therapeutics plc (NASDAQ:BCYC) Run Out Of Cash?

Simply Wall St

As the US$215m market cap Bicycle Therapeutics plc (NASDAQ:BCYC) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Bicycle Therapeutics is spending more money than it earns, it will need to fund its expenses via external sources of capital. Today I’ve examined Bicycle Therapeutics’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.

See our latest analysis for Bicycle Therapeutics

What is cash burn?

With a negative free cash flow of -US$27.7m, Bicycle Therapeutics is chipping away at its US$109m cash reserves in order to run its business. The riskiest factor facing investors of Bicycle Therapeutics is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the exciting, fast-growing biotech industry often face this problem, and Bicycle Therapeutics is no exception. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.

NasdaqGS:BCYC Income Statement, September 19th 2019

When will Bicycle Therapeutics need to raise more cash?

We can measure Bicycle Therapeutics's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.

In Bicycle Therapeutics’s case, its cash outflows fell by 45% last year, which may signal the company moving towards a more sustainable level of expenses. If free cash outflows are maintained at the current level of -US$27.7m, then given the current level of cash in the bank, Bicycle Therapeutics will not need to raise capital any time within the next three years. Even though this is analysis is fairly basic, and Bicycle Therapeutics still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.

Next Steps:

The risks involved in investing in loss-making Bicycle Therapeutics means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should Bicycle Therapeutics come to market to fund its operations. This is only a rough assessment of financial health, and BCYC likely also has company-specific issues impacting its cash management decisions. You should continue to research Bicycle Therapeutics to get a better picture of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BCYC’s future growth? Take a look at our free research report of analyst consensus for BCYC’s outlook.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Bicycle Therapeutics’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.