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. 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 Pieris Pharmaceuticals (NASDAQ:PIRS) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Pieris Pharmaceuticals

When Might Pieris 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 Pieris Pharmaceuticals last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth US$20m. Importantly, its cash burn was US$38m over the trailing twelve months. That means it had a cash runway of around 6 months as of June 2024. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Well Is Pieris Pharmaceuticals Growing?

Pieris Pharmaceuticals reduced its cash burn by 18% during the last year, which points to some degree of discipline. Unfortunately, however, operating revenue declined by 37% during the period. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Pieris Pharmaceuticals has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Pieris Pharmaceuticals Raise Cash?

Given Pieris Pharmaceuticals' revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Pieris Pharmaceuticals' cash burn of US$38m is about 177% of its US$21m market capitalisation. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.