Here's Why We're A Bit Worried About CHF Solutions's (NASDAQ:CHFS) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for CHF Solutions (NASDAQ:CHFS) shareholders is whether they should be concerned by its rate of 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.

See our latest analysis for CHF Solutions

How Long Is CHF Solutions's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When CHF Solutions last reported its balance sheet in June 2019, it had zero debt and cash worth US$7.4m. In the last year, its cash burn was US$15m. Therefore, from June 2019 it had roughly 6 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.

How Well Is CHF Solutions Growing?

In the last twelve months, CHF Solutions kept its cash burn steady. That's not too bad, but its revenue growth of 47% was definitely a positive. We think it is growing rather well, upon reflection. 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 CHF Solutions Raise More Cash Easily?

Given the trajectory of CHF Solutions's cash burn, many investors will already be thinking about how it might raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

CHF Solutions's cash burn of US$15m is about 225% of its US$6.7m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is CHF Solutions's Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought CHF Solutions's revenue growth was truly promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Notably, our data indicates that CHF Solutions insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course CHF Solutions may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.