We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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, the natural question for Minnova (CVE:MCI) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Minnova Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Minnova last reported its balance sheet in December 2019, it had zero debt and cash worth CA$13k. Looking at the last year, the company burnt through CA$86k. So it had a cash runway of approximately 2 months from December 2019. To be frank we are alarmed by how short that cash runway is! The image below shows how its cash balance has been changing over the last few years.
How Is Minnova’s Cash Burn Changing Over Time?
Because Minnova isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. From a cash flow perspective, it’s great to see the company’s cash burn dropped by 86% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Minnova makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Minnova Raise Cash?
While we’re comforted by the recent reduction evident from our analysis of Minnova’s cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. 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. 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.
Minnova’s cash burn of CA$86k is about 3.5% of its CA$2.5m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Minnova’s Cash Burn Situation?
On this analysis of Minnova’s cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, Minnova has 5 warning signs (and 3 which shouldn’t be ignored) we think you should know about.
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.
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