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Just because a business does not make any money, does not mean that the stock will go down. For example, Relmada Therapeutics (NASDAQ:RLMD) shareholders have done very well over the last year, with the share price soaring by 574%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Relmada Therapeutics shareholders to consider whether its cash burn is concerning. 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.
When Might Relmada Therapeutics 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. When Relmada Therapeutics last reported its balance sheet in March 2020, it had zero debt and cash worth US$115m. In the last year, its cash burn was US$14m. So it had a cash runway of about 8.1 years from March 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Is Relmada Therapeutics's Cash Burn Changing Over Time?
Relmada Therapeutics didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by a very significant 56%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Relmada Therapeutics Raise More Cash Easily?
Given its cash burn trajectory, Relmada Therapeutics shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Relmada Therapeutics has a market capitalisation of US$760m and burnt through US$14m last year, which is 1.9% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Relmada Therapeutics's Cash Burn Situation?
As you can probably tell by now, we're not too worried about Relmada Therapeutics's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. 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. On another note, Relmada Therapeutics has 4 warning signs (and 2 which don't sit too well with us) 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)
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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