We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Botanix Pharmaceuticals (ASX:BOT) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Botanix Pharmaceuticals Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Botanix Pharmaceuticals last reported its balance sheet in June 2019, it had zero debt and cash worth AU$4.7m. Looking at the last year, the company burnt through AU$13m. So it had a cash runway of approximately 4 months from June 2019. Notably, one analyst forecasts that Botanix Pharmaceuticals will break even (at a free cash flow level) in about 2 years. 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 Well Is Botanix Pharmaceuticals Growing?
At first glance it's a bit worrying to see that Botanix Pharmaceuticals actually boosted its cash burn by 33%, year on year. On a more positive note, the operating revenue improved by 164% over the period, offering an indication that the expenditure may well be worthwhile. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Botanix Pharmaceuticals To Raise More Cash For Growth?
Given the trajectory of Botanix Pharmaceuticals's cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Botanix Pharmaceuticals's cash burn of AU$13m is about 14% of its AU$94m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is Botanix Pharmaceuticals's Cash Burn A Worry?
On this analysis of Botanix Pharmaceuticals's cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Botanix Pharmaceuticals insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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. Thank you for reading.