Here's Why We're Not At All Concerned With Gentian Diagnostics' (OB:GENT) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Gentian Diagnostics (OB:GENT) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Our analysis indicates that GENT is potentially overvalued!

How Long Is Gentian Diagnostics' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Gentian Diagnostics had cash of kr92m and no debt. Looking at the last year, the company burnt through kr43m. So it had a cash runway of about 2.2 years from June 2022. Importantly, though, the one analyst we see covering the stock thinks that Gentian Diagnostics will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.

How Well Is Gentian Diagnostics Growing?

Gentian Diagnostics actually ramped up its cash burn by a whopping 60% in the last year, which shows it is boosting investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 20% in the same time frame. Considering both these factors, we're not particularly excited by its growth profile. 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 Gentian Diagnostics Raise Cash?

Gentian Diagnostics 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Gentian Diagnostics has a market capitalisation of kr645m and burnt through kr43m last year, which is 6.6% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Gentian Diagnostics' Cash Burn?

As you can probably tell by now, we're not too worried about Gentian Diagnostics' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Gentian Diagnostics that potential shareholders should take into account before putting money into a stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.