We're Keeping An Eye On Nuvectis Pharma's (NASDAQ:NVCT) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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 Nuvectis Pharma (NASDAQ:NVCT) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Nuvectis Pharma

How Long Is Nuvectis Pharma's Cash Runway?

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. In December 2021, Nuvectis Pharma had US$5.7m in cash, and was debt-free. Importantly, its cash burn was US$9.5m over the trailing twelve months. Therefore, from December 2021 it had roughly 7 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Hard Would It Be For Nuvectis Pharma To Raise More Cash For Growth?

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.

Nuvectis Pharma's cash burn of US$9.5m is about 6.4% of its US$148m market capitalisation. 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 Nuvectis Pharma's Cash Burn A Worry?

Because Nuvectis Pharma is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. We would undoubtedly be more comfortable if it had reported some operating revenue. However, it is fair to say that its cash burn relative to its market cap gave us comfort. To us, there is clearly a substantial risk that that the company will have to raise costly funding, making it very hard to quantify the potential upside. Taking a deeper dive, we've spotted 6 warning signs for Nuvectis Pharma you should be aware of, and 3 of them can't be ignored.

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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.