Here's Why Optimi Health (CSE:OPTI) Must Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Optimi Health (CSE:OPTI) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Optimi Health

Does Optimi Health Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Optimi Health last reported its balance sheet in December 2021, it had zero debt and cash worth CA$7.7m. In the last year, its cash burn was CA$14m. So it had a cash runway of approximately 7 months from December 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

How Is Optimi Health's Cash Burn Changing Over Time?

Because Optimi Health isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 194%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Optimi Health 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 Optimi Health To Raise More Cash For Growth?

Given its cash burn trajectory, Optimi Health 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Optimi Health has a market capitalisation of CA$25m and burnt through CA$14m last year, which is 56% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

How Risky Is Optimi Health's Cash Burn Situation?

There are no prizes for guessing that we think Optimi Health's cash burn is a bit of a worry. Take, for example, its increasing cash burn, which suggests the company may have difficulty funding itself, in the future. While not as bad as its increasing cash burn, its cash runway is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. Taking a deeper dive, we've spotted 5 warning signs for Optimi Health you should be aware of, and 2 of them shouldn't be ignored.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.