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What’s The Outlook For Loss-Making Novus Therapeutics Inc (NVUS)?

Cole Patterson

Novus Therapeutics Inc (NASDAQ:NVUS) continues its loss-making streak, announcing a -$6.28M 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. Below, I’ve analysed the most recent financial data to help answer this question. View our latest analysis for Novus Therapeutics

What is cash burn?

Currently, NVUS has $22.50M in cash holdings and producing negative cash flows from its day-to-day activities of -$11.67M. The biggest threat facing NVUS’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 pharma industry often face this problem, and NVUS is no exception. These companies face the trade-off between running the risk of depleting its cash reserves too fast, or falling behind competition on innovation and gaining market share by investing too slowly.

NasdaqCM:NVUS Income Statement Oct 6th 17
NasdaqCM:NVUS Income Statement Oct 6th 17

When will NVUS need to raise more cash?

Opex (excluding one-offs) grew by 14.17% over the past year, which is fairly normal for a small-cap. However, given how much money is currently in the bank, it seems that NVUS will not need to come to market any time soon. The company can continue to ramp up growth at the same rate without having to come to market within the next three years. Although this is a relatively simplistic calculation, and NVUS 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? It seems like NVUS will not need to raise capital anytime soon, even if its strong operational expense continues to grow over the next couple of years. Keep in mind that opex is only one side of the coin. I recommend also looking at NVUS’s revenues in order to forecast when the company will become breakeven and start producing profits for shareholders.

Are you a potential investor? Even though NVUS is growing its opex extremely fast, there’s plenty of cash runway for the company, meaning that there’s no urgent need for NVUS to raise further cash. So, if you’re waiting to participate in an upcoming equity raise, there’s no immediate cash-oriented catalyst for NVUS to issue more shares. In other words, if you like the company, there’s no benefit to waiting around in order to invest. That being said, you should have a solid investment thesis. Will you be comfortable holding shares in a loss-making company? Do you believe in its future potential?

Good management manages cash well – take a look at who sits on NVUS’s board and the CEO’s back ground and experience here. If risky loss-making stocks do not appeal to you, see 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.