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, 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, the natural question for Nova Eye Medical (ASX:EYE) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Check out our latest analysis for Nova Eye Medical
When Might Nova Eye Medical Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2022, Nova Eye Medical had cash of AU$8.0m and no debt. In the last year, its cash burn was AU$10m. So it had a cash runway of approximately 9 months from June 2022. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Well Is Nova Eye Medical Growing?
It was fairly positive to see that Nova Eye Medical reduced its cash burn by 33% during the last year. However, operating revenue was basically flat over that time period. On balance, we’d say the company is improving over time. In reality, this article only makes a short study of the company’s growth data. This graph of historic earnings and revenue shows how Nova Eye Medical is building its business over time.
How Hard Would It Be For Nova Eye Medical To Raise More Cash For Growth?
Given Nova Eye Medical’s revenue is receding, there’s a considerable chance it will eventually need to raise more money to spend on driving 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. 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.
Nova Eye Medical’s cash burn of AU$10m is about 29% of its AU$35m market capitalisation. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
Is Nova Eye Medical’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Nova Eye Medical’s cash burn reduction was relatively promising. Summing up, we think the Nova Eye Medical’s cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we’ve spotted 4 warning signs for Nova Eye Medical you should be aware of, and 3 of them shouldn’t be ignored.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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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