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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Nova Eye Medical (ASX:EYE) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Nova Eye Medical
When Might Nova Eye Medical Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2023, Nova Eye Medical had AU$7.4m in cash, and was debt-free. Importantly, its cash burn was AU$7.6m over the trailing twelve months. That means it had a cash runway of around 12 months as of June 2023. Notably, analysts forecast that Nova Eye Medical will break even (at a free cash flow level) in about 2 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Nova Eye Medical Growing?
We reckon the fact that Nova Eye Medical managed to shrink its cash burn by 26% over the last year is rather encouraging. And considering that its operating revenue gained 27% during that period, that's great to see. We think it is growing rather well, upon reflection. 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 Nova Eye Medical To Raise More Cash For Growth?
Nova Eye Medical seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).