We're Keeping An Eye On Novacyt's (EPA:ALNOV) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. 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.

So, the natural question for Novacyt (EPA:ALNOV) 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Novacyt

How Long Is Novacyt's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, Novacyt had UK£87m in cash, and was debt-free. Looking at the last year, the company burnt through UK£14m. So it had a cash runway of about 6.2 years from December 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

Is Novacyt's Revenue Growing?

Given that Novacyt actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The grim reality for shareholders is that operating revenue fell by 77% over the last twelve months, which is not what we want to see in a cash burning company. 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 Novacyt is building its business over time.

Can Novacyt Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Novacyt shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of UK£33m, Novacyt's UK£14m in cash burn equates to about 42% of its 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.

So, Should We Worry About Novacyt's Cash Burn?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Novacyt's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Novacyt's situation. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Novacyt (1 is concerning!) that you should be aware of before investing here.

Of course Novacyt 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.

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

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.