Yahoo Finance Is Nova Eye Medical (ASX:EYE) In A Good Position To Invest In Growth?
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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Nova Eye Medical (ASX:EYE) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Nova Eye Medical
Does Nova Eye Medical Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Nova Eye Medical had cash of AU$8.0m and no debt. Importantly, its cash burn was AU$10m over the trailing twelve months. That means it had a cash runway of around 9 months as of June 2022. 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 Nova Eye Medical Growing?
We reckon the fact that Nova Eye Medical managed to shrink its cash burn by 33% over the last year is rather encouraging. However, operating revenue was basically flat over that time period. On balance, we'd say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Nova Eye Medical Raise Cash?
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. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).
Since it has a market capitalisation of AU$39m, Nova Eye Medical's AU$10m in cash burn equates to about 26% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
How Risky Is Nova Eye Medical's Cash Burn Situation?
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 an in-depth view of risks, we've identified 3 warning signs for Nova Eye Medical that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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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