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We can readily understand why investors are attracted to unprofitable companies. 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 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 Minerva Neurosciences (NASDAQ:NERV) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Minerva Neurosciences' Cash Runway?
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. As at June 2020, Minerva Neurosciences had cash of US$35m and no debt. Importantly, its cash burn was US$40m over the trailing twelve months. So it had a cash runway of approximately 10 months from June 2020. Notably, however, analysts think that Minerva Neurosciences will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.
How Is Minerva Neurosciences' Cash Burn Changing Over Time?
In our view, Minerva Neurosciences doesn't yet produce significant amounts of operating revenue, since it reported just US$41m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 2.5% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Minerva Neurosciences To Raise More Cash For Growth?
Since its cash burn is increasing (albeit only slightly), Minerva Neurosciences shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. 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.
Minerva Neurosciences has a market capitalisation of US$129m and burnt through US$40m last year, which is 31% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
So, Should We Worry About Minerva Neurosciences' Cash Burn?
We must admit that we don't think Minerva Neurosciences is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its increasing cash burn acceptable, we can't ignore the fact that we consider its cash burn relative to its market cap to be downright troublesome. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Minerva Neurosciences (1 is a bit unpleasant!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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