We Think Eden Research (LON:EDEN) Needs To Drive Business Growth Carefully

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. 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 Eden Research (LON:EDEN) 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Eden Research

When Might Eden Research Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. Eden Research has such a small amount of debt that we'll set it aside, and focus on the UK£5.7m in cash it held at June 2021. Importantly, its cash burn was UK£3.1m over the trailing twelve months. Therefore, from June 2021 it had roughly 22 months of cash runway. 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. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.

How Well Is Eden Research Growing?

Some investors might find it troubling that Eden Research is actually increasing its cash burn, which is up 48% in the last year. And we must say we find it concerning that operating revenue dropped 16% over the same period. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how Eden Research has developed its business over time by checking this visualization of its revenue and earnings history.

Can Eden Research Raise More Cash Easily?

Eden Research seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Eden Research's cash burn of UK£3.1m is about 9.6% of its UK£32m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Eden Research's Cash Burn Situation?

On this analysis of Eden Research's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 3 warning signs for Eden Research you should be aware of, and 1 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)

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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