Is NeuroScientific Biopharmaceuticals (ASX:NSB) In A Good Position To Deliver On Growth Plans?

We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether NeuroScientific Biopharmaceuticals (ASX:NSB) shareholders should be worried about its cash burn. 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). 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 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. In December 2021, NeuroScientific Biopharmaceuticals had AU$9.5m in cash, and was debt-free. Importantly, its cash burn was AU$6.4m over the trailing twelve months. That means it had a cash runway of around 18 months as of December 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Is NeuroScientific Biopharmaceuticals' Cash Burn Changing Over Time?

Although NeuroScientific Biopharmaceuticals reported revenue of AU$959k last year, it didn't actually 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. Its cash burn positively exploded in the last year, up 264%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. 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 Easily Can NeuroScientific Biopharmaceuticals Raise Cash?

While NeuroScientific Biopharmaceuticals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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 and 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.

NeuroScientific Biopharmaceuticals has a market capitalisation of AU$29m and burnt through AU$6.4m last year, which is 22% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is NeuroScientific Biopharmaceuticals' Cash Burn Situation?

On this analysis of NeuroScientific Biopharmaceuticals' cash burn, we think its cash runway was reassuring, while its increasing cash burn 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. Taking a deeper dive, we've spotted 4 warning signs for NeuroScientific Biopharmaceuticals you should be aware of, and 2 of them are a bit unpleasant.

Of course NeuroScientific Biopharmaceuticals 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.