Companies Like NeuroOne Medical Technologies (NASDAQ:NMTC) Could Be Quite Risky

We can readily understand why investors are attracted to unprofitable companies. 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.

So, the natural question for NeuroOne Medical Technologies (NASDAQ:NMTC) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for NeuroOne Medical Technologies

How Long Is NeuroOne Medical Technologies' Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When NeuroOne Medical Technologies last reported its balance sheet in September 2021, it had zero debt and cash worth US$6.9m. Looking at the last year, the company burnt through US$8.7m. That means it had a cash runway of around 10 months as of September 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

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$243k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 144% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For NeuroOne Medical Technologies To Raise More Cash For Growth?

Given its cash burn trajectory, NeuroOne Medical Technologies shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

NeuroOne Medical Technologies' cash burn of US$8.7m is about 26% of its US$33m market capitalisation. 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.

Is NeuroOne Medical Technologies' Cash Burn A Worry?

NeuroOne Medical Technologies is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its increasing cash burn to be downright troublesome. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, we conducted an in-depth investigation of the company, and identified 7 warning signs for NeuroOne Medical Technologies (4 don't sit too well with us!) that you should be aware of before investing here.

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.