We're Hopeful That Mind Medicine (MindMed) (NASDAQ:MNMD) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Mind Medicine (MindMed) (NASDAQ:MNMD) 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Mind Medicine (MindMed)

When Might Mind Medicine (MindMed) Run Out Of Money?

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. As at September 2022, Mind Medicine (MindMed) had cash of US$155m and no debt. In the last year, its cash burn was US$45m. That means it had a cash runway of about 3.4 years as of September 2022. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Is Mind Medicine (MindMed)'s Cash Burn Changing Over Time?

Because Mind Medicine (MindMed) isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. 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.

How Easily Can Mind Medicine (MindMed) Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Mind Medicine (MindMed) to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 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).

Mind Medicine (MindMed) has a market capitalisation of US$152m and burnt through US$45m last year, which is 30% 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 Mind Medicine (MindMed)'s Cash Burn Situation?

On this analysis of Mind Medicine (MindMed)'s cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Mind Medicine (MindMed) (of which 1 doesn't sit too well with us!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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. 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.