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Just because a business does not make any money, does not mean that the stock will go down. 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.
So should NeuroOne Medical Technologies (NASDAQ:NMTC) shareholders be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does NeuroOne Medical Technologies Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. NeuroOne Medical Technologies has such a small amount of debt that we'll set it aside, and focus on the US$11m in cash it held at March 2021. Looking at the last year, the company burnt through US$5.3m. That means it had a cash runway of about 2.1 years as of March 2021. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Is NeuroOne Medical Technologies' Cash Burn Changing Over Time?
In our view, NeuroOne Medical Technologies doesn't yet produce significant amounts of operating revenue, since it reported just US$2.1m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how NeuroOne Medical Technologies is building its business over time.
How Easily Can NeuroOne Medical Technologies Raise Cash?
While NeuroOne Medical Technologies is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster 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 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.
NeuroOne Medical Technologies has a market capitalisation of US$87m and burnt through US$5.3m last year, which is 6.1% of the company's market value. 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.
Is NeuroOne Medical Technologies' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about NeuroOne Medical Technologies' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. 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. Separately, we looked at different risks affecting the company and spotted 5 warning signs for NeuroOne Medical Technologies (of which 2 are significant!) you should know about.
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)
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. 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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