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.
So should CVR Medical (CVE:CVM) 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. Let's start with an examination of the business's cash, relative to its cash burn.
How Long Is CVR Medical's Cash Runway?
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. As at September 2019, CVR Medical had cash of US$5.9k and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$3.8m over the trailing twelve months. That means it had a cash runway of under two months as of September 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.
How Is CVR Medical's Cash Burn Changing Over Time?
CVR Medical 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 21%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. CVR Medical 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 CVR Medical Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, CVR Medical shareholders may wish to think 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. Commonly, a business will sell new shares in itself to raise cash to drive 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).
In the last year, CVR Medical burned through US$3.8m, which is just about equal to its US$3.7m market cap. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
Is CVR Medical's Cash Burn A Worry?
There are no prizes for guessing that we think CVR Medical's cash burn is a bit of a worry. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. While not as bad as its cash runway, its increasing cash burn is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Its cash burn burn situation feels about as relaxing as riding your bicycle home in the rain without so much as a jumper. The need for more cash seems just around the corner, and any dilution is likely to be rather severe. Taking a deeper dive, we've spotted 4 warning signs for CVR Medical you should be aware of, and 3 of them can't be ignored.
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)
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.
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.