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, 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Guardion Health Sciences (NASDAQ:GHSI) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Guardion Health Sciences Have A Long 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. When Guardion Health Sciences last reported its balance sheet in June 2019, it had zero debt and cash worth US$2.4m. Looking at the last year, the company burnt through US$4.4m. So it had a cash runway of approximately 6 months from June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Is Guardion Health Sciences's Cash Burn Changing Over Time?
In the last year, Guardion Health Sciences did book revenue of US$1.0m, but its revenue from operations was less, at just US$1.0m. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. It's possible that the 12% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Guardion Health Sciences is building its business over time.
How Hard Would It Be For Guardion Health Sciences To Raise More Cash For Growth?
While Guardion Health Sciences 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 to 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 US$18m, Guardion Health Sciences's US$4.4m in cash burn equates to about 24% 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.
So, Should We Worry About Guardion Health Sciences's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Guardion Health Sciences's cash burn reduction was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Guardion Health Sciences CEO receives in total remuneration.
Of course Guardion Health Sciences may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.