Companies Like Greenwich LifeSciences (NASDAQ:GLSI) Are In A Position To Invest In Growth
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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Greenwich LifeSciences (NASDAQ:GLSI) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Greenwich LifeSciences
When Might Greenwich LifeSciences Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Greenwich LifeSciences last reported its balance sheet in September 2022, it had zero debt and cash worth US$16m. In the last year, its cash burn was US$6.3m. So it had a cash runway of about 2.5 years from September 2022. 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 Is Greenwich LifeSciences' Cash Burn Changing Over Time?
Greenwich LifeSciences didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by a very significant 98%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Greenwich LifeSciences Raise More Cash Easily?
While Greenwich LifeSciences does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Since it has a market capitalisation of US$255m, Greenwich LifeSciences' US$6.3m in cash burn equates to about 2.5% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
Is Greenwich LifeSciences' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Greenwich LifeSciences' cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Greenwich LifeSciences has 3 warning signs (and 2 which are concerning) we think you should know about.
Of course Greenwich LifeSciences 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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