Here's Why genedrive (LON:GDR) Must Use Its Cash Wisely

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. 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 genedrive (LON:GDR) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; 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 genedrive

How Long Is genedrive's Cash Runway?

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. As at December 2020, genedrive had cash of UK£3.8m and no debt. In the last year, its cash burn was UK£6.3m. So it had a cash runway of approximately 7 months from December 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is genedrive Growing?

Notably, genedrive actually ramped up its cash burn very hard and fast in the last year, by 160%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 48%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can genedrive Raise Cash?

Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily genedrive could raise cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

genedrive's cash burn of UK£6.3m is about 14% of its UK£45m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

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

On this analysis of genedrive'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. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Taking a deeper dive, we've spotted 6 warning signs for genedrive you should be aware of, and 3 of them are a bit concerning.

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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.
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