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Is Neptune Wellness Solutions (TSE:NEPT) In A Good Position To Deliver On Growth Plans?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Neptune Wellness Solutions (TSE:NEPT) 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. Let's start with an examination of the business's cash, relative to its cash burn.

Check out our latest analysis for Neptune Wellness Solutions

When Might Neptune Wellness Solutions 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. When Neptune Wellness Solutions last reported its balance sheet in September 2019, it had zero debt and cash worth CA$24m. In the last year, its cash burn was CA$31m. So it had a cash runway of approximately 9 months from September 2019. 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. Depicted below, you can see how its cash holdings have changed over time.

TSX:NEPT Historical Debt, January 20th 2020
TSX:NEPT Historical Debt, January 20th 2020

How Well Is Neptune Wellness Solutions Growing?

Notably, Neptune Wellness Solutions actually ramped up its cash burn very hard and fast in the last year, by 101%, signifying heavy investment in the business. While that's concerning on it's own, the fact that operating revenue was actually down 14% over the same period makes us positively tremulous. Considering both these metrics, we're a little concerned about how the company is developing. 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 Hard Would It Be For Neptune Wellness Solutions To Raise More Cash For Growth?

Neptune Wellness Solutions revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. 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. 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.

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Neptune Wellness Solutions's cash burn of CA$31m is about 8.3% of its CA$373m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Neptune Wellness Solutions's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Neptune Wellness Solutions's cash burn relative to its market cap was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Neptune Wellness Solutions insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.