Yahoo Finance We're Not Very Worried About PsyBio Therapeutics' (CVE:PSYB) Cash Burn Rate
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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should PsyBio Therapeutics (CVE:PSYB) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for PsyBio Therapeutics
Does PsyBio Therapeutics Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, PsyBio Therapeutics had cash of CA$9.7m and no debt. Looking at the last year, the company burnt through CA$4.6m. That means it had a cash runway of about 2.1 years as of June 2021. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Hard Would It Be For PsyBio Therapeutics To Raise More Cash For Growth?
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).
Since it has a market capitalisation of CA$38m, PsyBio Therapeutics' CA$4.6m in cash burn equates to about 12% of its market value. 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 PsyBio Therapeutics' Cash Burn A Worry?
Given it's an early stage company, we don't have a lot of data with which to judge PsyBio Therapeutics' cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash runway gave us comfort. To put it simply, we think its cash burn situation is totally fine given it is still developing its business. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for PsyBio Therapeutics (1 is significant!) that you should be aware of before investing here.
Of course PsyBio Therapeutics may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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.
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