U.S. markets open in 6 hours 4 minutes
  • S&P Futures

    4,324.25
    +6.50 (+0.15%)
     
  • Dow Futures

    34,044.00
    +1.00 (+0.00%)
     
  • Nasdaq Futures

    14,070.00
    +83.25 (+0.60%)
     
  • Russell 2000 Futures

    1,924.20
    -4.10 (-0.21%)
     
  • Crude Oil

    87.38
    +0.77 (+0.89%)
     
  • Gold

    1,793.10
    0.00 (0.00%)
     
  • Silver

    22.62
    -0.06 (-0.25%)
     
  • EUR/USD

    1.1135
    -0.0012 (-0.11%)
     
  • 10-Yr Bond

    1.8070
    0.0000 (0.00%)
     
  • Vix

    30.49
    -1.47 (-4.60%)
     
  • GBP/USD

    1.3371
    -0.0010 (-0.07%)
     
  • USD/JPY

    115.5650
    +0.2630 (+0.23%)
     
  • BTC-USD

    36,599.36
    +430.77 (+1.19%)
     
  • CMC Crypto 200

    828.78
    +9.27 (+1.13%)
     
  • FTSE 100

    7,530.23
    -24.08 (-0.32%)
     
  • Nikkei 225

    26,717.34
    +547.04 (+2.09%)
     

Here's Why We're Not Too Worried About NovaBay Pharmaceuticals' (NYSEMKT:NBY) Cash Burn Situation

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • NBY

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.

Given this risk, we thought we'd take a look at whether NovaBay Pharmaceuticals (NYSEMKT:NBY) shareholders should 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for NovaBay Pharmaceuticals

When Might NovaBay Pharmaceuticals Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2020, NovaBay Pharmaceuticals had US$12m in cash, and was debt-free. In the last year, its cash burn was US$4.7m. So it had a cash runway of about 2.5 years from December 2020. 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.

debt-equity-history-analysis
debt-equity-history-analysis

How Well Is NovaBay Pharmaceuticals Growing?

We reckon the fact that NovaBay Pharmaceuticals managed to shrink its cash burn by 40% over the last year is rather encouraging. Having said that, the revenue growth of 51% was considerably more inspiring. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can NovaBay Pharmaceuticals Raise Cash?

We are certainly impressed with the progress NovaBay Pharmaceuticals has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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$38m, NovaBay Pharmaceuticals' US$4.7m in cash burn equates to about 12% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is NovaBay Pharmaceuticals' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about NovaBay Pharmaceuticals' cash burn. For example, we think its revenue growth suggests that the company is on a good path. Its cash burn relative to its market cap wasn't quite as good, but was still rather encouraging! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking an in-depth view of risks, we've identified 4 warning signs for NovaBay Pharmaceuticals that you should be aware of before investing.

Of course NovaBay Pharmaceuticals 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.