Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Botanix Pharmaceuticals (ASX:BOT) shareholders 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'. Let's start with an examination of the business' cash, relative to its cash burn.
When Might Botanix Pharmaceuticals Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Botanix Pharmaceuticals last reported its balance sheet in December 2019, it had zero debt and cash worth AU$27m. Importantly, its cash burn was AU$24m over the trailing twelve months. Therefore, from December 2019 it had roughly 14 months of cash runway. Importantly, the one analyst we see covering the stock thinks that Botanix Pharmaceuticals will reach cashflow breakeven in around 21 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 Well Is Botanix Pharmaceuticals Growing?
Notably, Botanix Pharmaceuticals actually ramped up its cash burn very hard and fast in the last year, by 137%, signifying heavy investment in the business. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 62% growth in revenue, over the very same year. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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.
Can Botanix Pharmaceuticals Raise More Cash Easily?
While Botanix Pharmaceuticals seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Botanix Pharmaceuticals has a market capitalisation of AU$52m and burnt through AU$24m last year, which is 47% 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.
Is Botanix Pharmaceuticals' Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Botanix Pharmaceuticals' revenue growth was relatively promising. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. An in-depth examination of risks revealed 2 warning signs for Botanix Pharmaceuticals that readers should think about before committing capital to this stock.
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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. 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.
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