Even when a business loses money, it is possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mineral discovery. But while history praises these rare successes, those that fail are often forgotten; who remembers Pets.com?
So the natural question for NervGen Pharma (CVE: NGEN) is whether they should be concerned about its rate of cash consumption. In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
When might NervGen Pharma run out of money?
A company’s cash flow trail is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of September 2020, NervGen Pharma had C $ 7.7 million in cash and no debt. Importantly, its cash consumption amounted to C $ 6.4 million over the past twelve months. This means he had a cash trail of around 14 months as of September 2020. It’s not too bad, but it’s fair to say that the end of the cash trail is in sight, unless consumption cash flow does not significantly reduce. The image below shows how her cash balance has evolved over the past few years.
How does NervGen Pharma’s silver consumption change over time?
NervGen Pharma has not recorded any revenue over the past year, indicating that it is a start-up company that continues to expand its business. So while we can’t look at sales to understand growth, we can look at changes in cash consumption to understand changes in expenses over time. With cash usage down 6.4%, it appears management believes the company is spending enough to move its business plans forward at an appropriate pace. NervGen Pharma is making us a little nervous due to its lack of substantial operating revenue. We prefer most stocks on that list of stocks that analysts expect to grow.
Can NervGen Pharma easily raise more money?
While NervGen Pharma shows a sharp reduction in its consumption of cash, it’s still worth considering how easily it could raise more cash, if only to fuel faster growth. The issuance of new shares or indebtedness are the most common ways for a listed company to raise more money for its activity. Usually, a company will sell new stocks on its own to raise funds and stimulate growth. We can compare a company’s cash consumption to its market capitalization to get an idea of how many new shares a company would need to issue to fund its one-year operations.
NervGen Pharma’s cash consumption of C $ 6.4 million represents approximately 9.7% of its market capitalization of C $ 66 million. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.
How risky is NervGen Pharma’s cash flow situation?
The good news is that we believe the cash burn situation at NervGen Pharma gives shareholders real cause for optimism. On the one hand, we have its strong cash flow track, while on the other hand, it can also boast of very high cash consumption relative to its market cap. Money-burning businesses are always on the riskier side of things, but after looking at all the factors discussed in this short article, we’re not too concerned about its rate of cash consumption. Separately, we examined different risks affecting the business and identified 4 warning signs for NervGen Pharma (1 of which is potentially serious!) that you should be aware of.
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