There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Deep Yellow (ASX:DYL) shareholders have done very well over the last year, with the share price soaring by 113%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for Deep Yellow shareholders to consider whether its cash burn is concerning. 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 Deep Yellow

How Long Is Deep Yellow's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2023, Deep Yellow had cash of AU$41m and no debt. Looking at the last year, the company burnt through AU$33m. That means it had a cash runway of around 15 months as of June 2023. 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. Depicted below, you can see how its cash holdings have changed over time.

How Is Deep Yellow's Cash Burn Changing Over Time?

Whilst it's great to see that Deep Yellow has already begun generating revenue from operations, last year it only produced AU$38k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 176%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. 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.

How Easily Can Deep Yellow Raise Cash?

Given its cash burn trajectory, Deep Yellow shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 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).