Eliem Therapeutics (NASDAQ:ELYM) Is In A Good Position To Deliver On Growth Plans
Just because a business does not make any money, does not mean that the stock will go down. 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 Eliem Therapeutics (NASDAQ:ELYM) shareholders should be worried about its cash burn. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Eliem Therapeutics
Does Eliem Therapeutics Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Eliem Therapeutics last reported its balance sheet in June 2023, it had zero debt and cash worth US$103m. In the last year, its cash burn was US$36m. So it had a cash runway of about 2.9 years from June 2023. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Is Eliem Therapeutics' Cash Burn Changing Over Time?
Because Eliem Therapeutics isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 22% over the last year suggests some degree of prudence. Eliem Therapeutics makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Eliem Therapeutics Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Eliem Therapeutics 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. 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).
Eliem Therapeutics has a market capitalisation of US$71m and burnt through US$36m last year, which is 50% 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.
How Risky Is Eliem Therapeutics' Cash Burn Situation?
On this analysis of Eliem Therapeutics' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Eliem Therapeutics' situation. On another note, Eliem Therapeutics has 3 warning signs (and 2 which can't be ignored) we think you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.
