Here's Why We're Watching Neurotech International's (ASX:NTI) 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. 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 Neurotech International (ASX:NTI) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Neurotech International

When Might Neurotech International Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Neurotech International has such a small amount of debt that we'll set it aside, and focus on the AU$3.0m in cash it held at December 2021. Importantly, its cash burn was AU$3.2m over the trailing twelve months. So it had a cash runway of approximately 11 months from December 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Is Neurotech International's Cash Burn Changing Over Time?

Although Neurotech International had revenue of AU$394k in the last twelve months, its operating revenue was only AU$223k in that time period. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. In fact, it ramped its spending strongly over the last year, increasing cash burn by 186%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Neurotech International makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For Neurotech International To Raise More Cash For Growth?

Given its cash burn trajectory, Neurotech International shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 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).

Neurotech International's cash burn of AU$3.2m is about 8.0% of its AU$40m 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.

So, Should We Worry About Neurotech International's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Neurotech International's cash burn relative to its market cap was relatively promising. 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. On another note, Neurotech International has 4 warning signs (and 3 which are a bit concerning) we think you should know about.

Of course Neurotech International 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.