Here's Why We're Not Too Worried About Minerva Neurosciences' (NASDAQ:NERV) Cash Burn Situation

By
Simply Wall St
Published
October 02, 2021
NasdaqGM:NERV
Source: Shutterstock

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Minerva Neurosciences (NASDAQ:NERV) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Minerva Neurosciences

Does Minerva Neurosciences Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Minerva Neurosciences last reported its balance sheet in June 2021, it had zero debt and cash worth US$74m. Looking at the last year, the company burnt through US$28m. Therefore, from June 2021 it had 2.6 years of cash runway. Notably, analysts forecast that Minerva Neurosciences will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NasdaqGM:NERV Debt to Equity History October 2nd 2021

How Is Minerva Neurosciences' Cash Burn Changing Over Time?

Minerva Neurosciences didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Even though it doesn't get us excited, the 30% reduction in cash burn year on year does suggest the company can continue operating for quite some time. 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.

How Hard Would It Be For Minerva Neurosciences To Raise More Cash For Growth?

While Minerva Neurosciences is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Minerva Neurosciences' cash burn of US$28m is about 42% of its US$68m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About Minerva Neurosciences' Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Minerva Neurosciences' cash runway was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Minerva Neurosciences' situation. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Minerva Neurosciences (2 are significant!) that you should be aware of before investing here.

Of course Minerva Neurosciences 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.