Dilution Ahead For Neovasc Inc (TSX:NVCN) Shareholders?
Neovasc Inc (TSX:NVCN) continues its loss-making streak, announcing a -$5.11M earnings for its latest financial year ending. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Looking at NVCN’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for NVCN
What is cash burn?
Currently, NVCN has $11.58M in cash holdings and producing negative cash flows from its day-to-day activities of -$28.04M. The biggest threat facing NVCN’s investor is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the high-growth healthcare industry often face this problem, and NVCN is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.
When will NVCN need to raise more cash?
Over the last twelve months, opex (excluding one-offs) increased by 25.56%, which is rather substantial. My cash burn analysis suggests that, if NVCN continues to spend its cash reserves at this current high rate, it’ll have to raise capital within the next 6 months, which may be a surprise to some shareholders. Furthermore, even if NVCN kept its opex level at the current $26.3M, it will still be coming to market in the next couple of months. Although this is a relatively simplistic calculation, and NVCN may reduce its costs or raise debt capital instead of coming to equity markets, the analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
What this means for you:
Are you a shareholder? In the context of your portfolio, you should always seek to diversify, especially if you have a relatively high exposure to NVCN. You now have a better understanding of the risks you may face holding onto the stock, since we know the company could potentially run into some issues in the next couple of months. Now that we’ve accounted for opex growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven.
Are you a potential investor? This analysis isn’t meant to deter you from buying NVCN, but rather, to help you understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for NVCN, due to its high opex growth and its level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should NVCN come to market to fund its operations.
Good management manages cash well – have a peek at NVCN’s CEO experience and the tenure of the board here. If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio..
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
