Is Minerva Neurosciences (NASDAQ:NERV) In A Good Position To Deliver On Growth Plans?

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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

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 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 Minerva Neurosciences

When Might Minerva Neurosciences 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 2021, Minerva Neurosciences had cash of US$66m and no debt. Looking at the last year, the company burnt through US$27m. Therefore, from September 2021 it had 2.4 years of cash runway. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

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 34% reduction in cash burn year on year does suggest the company can continue operating for quite some time. 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.

Can Minerva Neurosciences Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Minerva Neurosciences 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).

Minerva Neurosciences' cash burn of US$27m is about 86% of its US$31m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is Minerva Neurosciences' Cash Burn Situation?

On this analysis of Minerva Neurosciences' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking a deeper dive, we've spotted 4 warning signs for Minerva Neurosciences you should be aware of, and 1 of them is concerning.

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.

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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.