Will NeuroOne Medical Technologies (NASDAQ:NMTC) Spend Its Cash Wisely?
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 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 NeuroOne Medical Technologies (NASDAQ:NMTC) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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 NeuroOne Medical Technologies
When Might NeuroOne Medical Technologies Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, NeuroOne Medical Technologies had cash of US$7.6m and no debt. Importantly, its cash burn was US$8.6m over the trailing twelve months. That means it had a cash runway of around 11 months as of December 2022. 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 NeuroOne Medical Technologies' Cash Burn Changing Over Time?
Whilst it's great to see that NeuroOne Medical Technologies has already begun generating revenue from operations, last year it only produced US$3.6m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 10.0% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. 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 NeuroOne Medical Technologies Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for NeuroOne Medical Technologies to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of US$26m, NeuroOne Medical Technologies' US$8.6m in cash burn equates to about 33% 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 NeuroOne Medical Technologies' Cash Burn?
On this analysis of NeuroOne Medical Technologies' cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the NeuroOne Medical Technologies' cash burn is a risk, based on the factors we mentioned in this article. On another note, NeuroOne Medical Technologies has 6 warning signs (and 2 which are a bit unpleasant) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
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