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Can NeuroOne Medical Technologies (NASDAQ:NMTC) Afford To Invest In Growth?
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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should NeuroOne Medical Technologies (NASDAQ:NMTC) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for NeuroOne Medical Technologies
How Long Is NeuroOne Medical Technologies' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2023, NeuroOne Medical Technologies had cash of US$4.6m and no debt. Importantly, its cash burn was US$9.0m over the trailing twelve months. Therefore, from March 2023 it had roughly 6 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is NeuroOne Medical Technologies' Cash Burn Changing Over Time?
In our view, NeuroOne Medical Technologies doesn't yet produce significant amounts of operating revenue, since it reported just US$4.1m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 14% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. 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.
Can NeuroOne Medical Technologies Raise More Cash Easily?
While NeuroOne Medical Technologies 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
NeuroOne Medical Technologies has a market capitalisation of US$28m and burnt through US$9.0m last year, which is 32% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
How Risky Is NeuroOne Medical Technologies' Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought NeuroOne Medical Technologies' cash burn reduction was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Separately, we looked at different risks affecting the company and spotted 7 warning signs for NeuroOne Medical Technologies (of which 2 don't sit too well with us!) you should know about.
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. 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.
About NasdaqCM:NMTC
NeuroOne Medical Technologies
A medical technology company, provides solutions for continuous electroencephalogram (cEEG) and stereoelectrocencephalography (sEEG) recording in the United States.
Medium-low with adequate balance sheet.