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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for G&E Herbal Biotechnology (GTSM:4911) 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.
How Long Is G&E Herbal Biotechnology's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When G&E Herbal Biotechnology last reported its balance sheet in September 2020, it had zero debt and cash worth NT$121m. In the last year, its cash burn was NT$9.2m. So it had a very long cash runway of many years from September 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
How Is G&E Herbal Biotechnology's Cash Burn Changing Over Time?
In our view, G&E Herbal Biotechnology doesn't yet produce significant amounts of operating revenue, since it reported just NT$24m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The 71% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Admittedly, we're a bit cautious of G&E Herbal Biotechnology due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For G&E Herbal Biotechnology To Raise More Cash For Growth?
There's no doubt G&E Herbal Biotechnology's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. 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.
G&E Herbal Biotechnology's cash burn of NT$9.2m is about 0.5% of its NT$1.8b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is G&E Herbal Biotechnology's Cash Burn Situation?
As you can probably tell by now, we're not too worried about G&E Herbal Biotechnology's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking a deeper dive, we've spotted 3 warning signs for G&E Herbal Biotechnology you should be aware of, and 2 of them are a bit unpleasant.
Of course G&E Herbal Biotechnology may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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