We're A Little Worried About genedrive's (LON:GDR) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should genedrive (LON:GDR) shareholders 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for genedrive

Does genedrive Have A Long 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. Looking at the last year, the company burnt through UK£6.3m. That means it had a cash runway of around 7 months as of December 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

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. While that's concerning on it's own, the fact that operating revenue was actually down 48% over the same period makes us positively tremulous. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how genedrive has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For genedrive To Raise More Cash For Growth?

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. 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£29m, genedrive's UK£6.3m in cash burn equates to about 22% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is genedrive's Cash Burn Situation?

genedrive is not in a great position when it comes to its cash burn situation. While its cash burn relative to its market cap wasn't too bad, its increasing cash burn does leave us rather nervous. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for genedrive (2 are significant!) that you should be aware of before investing here.

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)

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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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