Is Guardion Health Sciences (NASDAQ:GHSI) In A Good Position 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, 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Guardion Health Sciences (NASDAQ:GHSI) shareholders should 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Guardion Health Sciences

How Long Is Guardion Health Sciences' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Guardion Health Sciences last reported its balance sheet in September 2020, it had zero debt and cash worth US$9.8m. Importantly, its cash burn was US$7.7m over the trailing twelve months. Therefore, from September 2020 it had roughly 15 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Is Guardion Health Sciences' Cash Burn Changing Over Time?

Although Guardion Health Sciences had revenue of US$1.9m in the last twelve months, its operating revenue was only US$1.9m in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. With the cash burn rate up 46% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Guardion Health Sciences is building its business over time.

How Hard Would It Be For Guardion Health Sciences To Raise More Cash For Growth?

While Guardion Health Sciences does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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. 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.

Guardion Health Sciences' cash burn of US$7.7m is about 36% of its US$22m 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.

So, Should We Worry About Guardion Health Sciences' Cash Burn?

On this analysis of Guardion Health Sciences' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Guardion Health Sciences' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Guardion Health Sciences (of which 1 doesn't sit too well with us!) you should know about.

Of course Guardion Health Sciences 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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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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