We're Hopeful That NeuroMetrix (NASDAQ:NURO) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, NeuroMetrix (NASDAQ:NURO) shareholders have done very well over the last year, with the share price soaring by 390%. 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 notwithstanding the buoyant share price, we think it's well worth asking whether NeuroMetrix's cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for NeuroMetrix

When Might NeuroMetrix Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When NeuroMetrix last reported its balance sheet in March 2021, it had zero debt and cash worth US$5.1m. Looking at the last year, the company burnt through US$1.4m. That means it had a cash runway of about 3.8 years as of March 2021. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is NeuroMetrix Growing?

NeuroMetrix managed to reduce its cash burn by 72% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 12% during the same time frame. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how NeuroMetrix is building its business over time.

Can NeuroMetrix Raise More Cash Easily?

There's no doubt NeuroMetrix seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of US$38m, NeuroMetrix's US$1.4m in cash burn equates to about 3.6% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is NeuroMetrix's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about NeuroMetrix's cash burn. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for NeuroMetrix that investors should know when investing in the stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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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