Companies Like NeuroScientific Biopharmaceuticals (ASX:NSB) Can Afford To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. Indeed, NeuroScientific Biopharmaceuticals (ASX:NSB) stock is up 103% in the last year, providing strong gains for shareholders. 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 notwithstanding the buoyant share price, we think it's well worth asking whether NeuroScientific Biopharmaceuticals' cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for NeuroScientific Biopharmaceuticals

How Long Is NeuroScientific Biopharmaceuticals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, NeuroScientific Biopharmaceuticals had cash of AU$5.0m and no debt. Looking at the last year, the company burnt through AU$1.8m. So it had a cash runway of about 2.8 years from December 2020. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Is NeuroScientific Biopharmaceuticals' Cash Burn Changing Over Time?

While NeuroScientific Biopharmaceuticals did record statutory revenue of AU$17k over the last year, it didn't have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. As it happens, the company's cash burn reduced by 16% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. NeuroScientific Biopharmaceuticals 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 NeuroScientific Biopharmaceuticals To Raise More Cash For Growth?

While NeuroScientific Biopharmaceuticals is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

NeuroScientific Biopharmaceuticals' cash burn of AU$1.8m is about 3.4% of its AU$52m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is NeuroScientific Biopharmaceuticals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way NeuroScientific Biopharmaceuticals is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, NeuroScientific Biopharmaceuticals has 5 warning signs (and 3 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)

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