Is Gemina Laboratories (CSE:GLAB) In A Good Position To Invest In Growth?

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. 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 Gemina Laboratories (CSE:GLAB) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Gemina Laboratories

When Might Gemina Laboratories Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at October 2021, Gemina Laboratories had cash of CA$2.2m and no debt. In the last year, its cash burn was CA$3.1m. Therefore, from October 2021 it had roughly 9 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.

Can Gemina Laboratories Raise More Cash Easily?

Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of CA$27m, Gemina Laboratories' CA$3.1m in cash burn equates to about 11% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Gemina Laboratories' Cash Burn?

Because Gemina Laboratories is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. But generally speaking, we can say that early stage companies like Gemina Laboratories are generally higher risk than well established businesses. To us, there is clearly a substantial risk that that the company will have to raise costly funding, making it very hard to quantify the potential upside. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Gemina Laboratories (3 are potentially serious!) that you should be aware of before investing here.

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.