We're Not Very Worried About NeuroOne Medical Technologies' (NASDAQ:NMTC) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

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

When Might NeuroOne Medical Technologies 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. As at March 2021, NeuroOne Medical Technologies had cash of US$11m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$5.3m. So it had a cash runway of about 2.1 years from March 2021. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

How Is NeuroOne Medical Technologies' Cash Burn Changing Over Time?

Whilst it's great to see that NeuroOne Medical Technologies has already begun generating revenue from operations, last year it only produced US$2.1m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how NeuroOne Medical Technologies has developed its business over time by checking this visualization of its revenue and earnings history.

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

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for NeuroOne Medical Technologies to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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$87m and burnt through US$5.3m last year, which is 6.1% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is NeuroOne Medical Technologies' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way NeuroOne Medical Technologies is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. 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. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for NeuroOne Medical Technologies (2 don't sit too well with us!) that you should be aware of before investing here.

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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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