Companies Like Trellus Health (LON:TRLS) Are In A Position To Invest In Growth

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Trellus Health (LON:TRLS) shareholders should be worried about its 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Trellus Health

How Long Is Trellus Health's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Trellus Health had US$3.7m in cash, and was debt-free. Looking at the last year, the company burnt through US$2.6m. Therefore, from December 2020 it had roughly 17 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

Can Trellus Health Raise More Cash Easily?

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 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 US$152m, Trellus Health's US$2.6m in cash burn equates to about 1.7% of its market value. 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 Trellus Health's Cash Burn Situation?

Because Trellus Health is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash burn relative to its market cap gave us comfort. The bottom line is that we think its cash burn seems fairly reasonable, given it is still chasing growth. On another note, Trellus Health has 2 warning signs (and 1 which is concerning) we think you should know about.

Of course Trellus Health 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.

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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.
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