Companies Like Guard Therapeutics International (STO:GUARD) Are In A Position To Invest In Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Guard Therapeutics International (STO:GUARD) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Guard Therapeutics International

When Might Guard Therapeutics International Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. Guard Therapeutics International has such a small amount of debt that we'll set it aside, and focus on the kr90m in cash it held at December 2020. Importantly, its cash burn was kr38m over the trailing twelve months. Therefore, from December 2020 it had 2.4 years of cash runway. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Is Guard Therapeutics International's Cash Burn Changing Over Time?

Because Guard Therapeutics International isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Even though it doesn't get us excited, the 37% reduction in cash burn year on year does suggest the company can continue operating for quite some time. 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 Guard Therapeutics International Raise Cash?

While Guard Therapeutics International is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Guard Therapeutics International has a market capitalisation of kr255m and burnt through kr38m last year, which is 15% of the company's market value. 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.

How Risky Is Guard Therapeutics International's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Guard Therapeutics International is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even though its cash burn relative to its market cap wasn't quite as impressive, it was still a positive. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking a deeper dive, we've spotted 4 warning signs for Guard Therapeutics International you should be aware of, and 1 of them is a bit unpleasant.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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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