We Think Nova Mentis Life Science (CSE:NOVA) Can Afford To Drive Business Growth

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. 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 should Nova Mentis Life Science (CSE:NOVA) shareholders 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 Nova Mentis Life Science

When Might Nova Mentis Life Science 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. As at September 2020, Nova Mentis Life Science had cash of CA$1.2m and no debt. Importantly, its cash burn was CA$597k over the trailing twelve months. That means it had a cash runway of about 2.0 years as of September 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

How Is Nova Mentis Life Science's Cash Burn Changing Over Time?

In our view, Nova Mentis Life Science doesn't yet produce significant amounts of operating revenue, since it reported just CA$17k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The 56% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Nova Mentis Life Science makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Nova Mentis Life Science To Raise More Cash For Growth?

There's no doubt Nova Mentis Life Science's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further 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).

Nova Mentis Life Science's cash burn of CA$597k is about 1.7% of its CA$36m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Nova Mentis Life Science's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Nova Mentis Life Science's cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even though its cash runway wasn't quite as impressive, it was still a positive. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. Taking a deeper dive, we've spotted 5 warning signs for Nova Mentis Life Science you should be aware of, and 3 of them are concerning.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

When trading Nova Mentis Life Science or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.