Here’s Why We’re Not Too Worried About Rhythm Biosciences’ (ASX:RHY) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we’d take a look at whether Rhythm Biosciences (ASX: TOO) 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Rhythm Biosciences

How Long Is Rhythm Biosciences’ Cash Runway?

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. In December 2022, Rhythm Biosciences had AU$8.9m in cash, and was debt-free. In the last year, its cash burn was AU$6.2m. So it had a cash runway of approximately 17 months from December 2022. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Is Rhythm Biosciences’ Cash Burn Changing Over Time?

Although Rhythm Biosciences had revenue of AU$2.7m in the last twelve months, its operating revenue was only AU$294k in that time period. Given how low that operating leverage is, we think it’s too early to put much weight on the revenue growth, so we’ll focus on how the cash burn is changing, instead. Over the last year its cash burn actually increased by 2.2%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. Rhythm Biosciences 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.

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How Hard Would It Be For Rhythm Biosciences To Raise More Cash For Growth?

Since its cash burn is increasing (albeit only slightly), Rhythm Biosciences shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.

Rhythm Biosciences’ cash burn of AU$6.2m is about 6.0% of its AU$104m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.

Is Rhythm Biosciences’ Cash Burn A Worry?

On this analysis of Rhythm Biosciences’ cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn 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 Rhythm Biosciences’ situation. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Rhythm Biosciences (of which 2 make us uncomfortable!) you should know about.

Of course Rhythm Biosciences 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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