We're Not Very Worried About NEXT Biometrics Group's (OB:NEXT) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether NEXT Biometrics Group (OB:NEXT) 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. 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 NEXT Biometrics Group

Does NEXT Biometrics Group Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When NEXT Biometrics Group last reported its balance sheet in December 2022, it had zero debt and cash worth kr70m. In the last year, its cash burn was kr32m. Therefore, from December 2022 it had 2.2 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Well Is NEXT Biometrics Group Growing?

We reckon the fact that NEXT Biometrics Group managed to shrink its cash burn by 32% over the last year is rather encouraging. But the revenue dip of 6.6% in the same period was a bit concerning. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how NEXT Biometrics Group has developed its business over time by checking this visualization of its revenue and earnings history.

Can NEXT Biometrics Group Raise More Cash Easily?

NEXT Biometrics Group 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. 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.

Since it has a market capitalisation of kr432m, NEXT Biometrics Group's kr32m in cash burn equates to about 7.5% of its 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 NEXT Biometrics Group's Cash Burn?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought NEXT Biometrics Group's cash burn relative to its market cap was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for NEXT Biometrics Group 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 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.