Here's Why Nuheara (ASX:NUH) Must Use Its Cash Wisely

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Nuheara (ASX:NUH) shareholders should be worried about its cash burn. 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 Nuheara

When Might Nuheara Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Nuheara last reported its balance sheet in December 2021, it had zero debt and cash worth AU$6.3m. In the last year, its cash burn was AU$11m. Therefore, from December 2021 it had roughly 7 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Well Is Nuheara Growing?

Some investors might find it troubling that Nuheara is actually increasing its cash burn, which is up 48% in the last year. Also concerning, operating revenue was actually down by 6.6% in that time. Considering both these metrics, we're a little concerned about how the company is developing. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Nuheara is building its business over time.

How Easily Can Nuheara Raise Cash?

Since Nuheara can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Nuheara's cash burn of AU$11m is about 36% of its AU$32m market capitalisation. 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 Nuheara's Cash Burn Situation?

We must admit that we don't think Nuheara is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its falling revenue acceptable, we can't ignore the fact that we consider its cash runway to be downright troublesome. 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. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Nuheara (of which 4 are a bit unpleasant!) 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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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.