Yahoo Finance We're Keeping An Eye On Novoheart Holdings's (CVE:NVH) Cash Burn Rate
Just because a business does not make any money, does not mean that the stock will go down. 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.
So should Novoheart Holdings (CVE:NVH) shareholders 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Novoheart Holdings
When Might Novoheart Holdings Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Novoheart Holdings last reported its balance sheet in December 2019, it had zero debt and cash worth CA$12m. In the last year, its cash burn was CA$8.2m. So it had a cash runway of approximately 18 months from December 2019. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Is Novoheart Holdings's Cash Burn Changing Over Time?
In our view, Novoheart Holdings doesn't yet produce significant amounts of operating revenue, since it reported just CA$533k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. In fact, it ramped its spending strongly over the last year, increasing cash burn by 101%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Novoheart Holdings makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Novoheart Holdings Raise More Cash Easily?
While Novoheart Holdings 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Novoheart Holdings's cash burn of CA$8.2m is about 9.4% of its CA$87m 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.
Is Novoheart Holdings's Cash Burn A Worry?
On this analysis of Novoheart Holdings's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Novoheart Holdings's situation. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Novoheart Holdings (3 can't be ignored!) that you should be aware of before investing here.
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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. Thank you for reading.