We're Hopeful That MediciNova (NASDAQ:MNOV) Will Use Its Cash Wisely

By
Simply Wall St
Published
March 19, 2022
NasdaqGM:MNOV
Source: Shutterstock

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, the natural question for MediciNova (NASDAQ:MNOV) shareholders is whether they should be concerned by its rate of cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for MediciNova

When Might MediciNova 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 December 2021, MediciNova had cash of US$71m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was US$9.4m. Therefore, from December 2021 it had 7.6 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqGM:MNOV Debt to Equity History March 19th 2022

How Is MediciNova's Cash Burn Changing Over Time?

Whilst it's great to see that MediciNova has already begun generating revenue from operations, last year it only produced US$4.0m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 13% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can MediciNova Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for MediciNova to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

MediciNova has a market capitalisation of US$126m and burnt through US$9.4m last year, which is 7.5% 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 MediciNova's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way MediciNova is burning through its cash. For example, we think its cash runway 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. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Separately, we looked at different risks affecting the company and spotted 4 warning signs for MediciNova (of which 1 can't be ignored!) 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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