We Think Guardion Health Sciences (NASDAQ:GHSI) Needs To Drive Business Growth Carefully
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 Guardion Health Sciences (NASDAQ:GHSI) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Guardion Health Sciences
How Long Is Guardion Health Sciences' Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Guardion Health Sciences last reported its balance sheet in June 2020, it had zero debt and cash worth US$12m. Importantly, its cash burn was US$7.7m over the trailing twelve months. So it had a cash runway of approximately 18 months from June 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Well Is Guardion Health Sciences Growing?
Guardion Health Sciences boosted investment sharply in the last year, with cash burn ramping by 74%. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 77%. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Guardion Health Sciences is growing revenue over time by checking this visualization of past revenue growth.
How Easily Can Guardion Health Sciences Raise Cash?
Even though it seems like Guardion Health Sciences is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Guardion Health Sciences' cash burn of US$7.7m is about 38% of its US$20m market capitalisation. 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.
How Risky Is Guardion Health Sciences' Cash Burn Situation?
On this analysis of Guardion Health Sciences' cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Guardion Health Sciences (of which 2 are a bit concerning!) 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)
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.
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