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We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Nova Eye Medical (ASX:EYE) 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. Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Nova Eye Medical
When Might Nova Eye Medical Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Nova Eye Medical last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth AU$6.2m. Looking at the last year, the company burnt through AU$8.3m. That means it had a cash runway of around 9 months as of June 2024. Importantly, analysts think that Nova Eye Medical will reach cashflow breakeven in around 22 months. 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.
How Well Is Nova Eye Medical Growing?
At first glance it's a bit worrying to see that Nova Eye Medical actually boosted its cash burn by 8.9%, year on year. The good news is that operating revenue increased by 37% in the last year, indicating that the business is gaining some traction. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Nova Eye Medical To Raise More Cash For Growth?
While Nova Eye Medical seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).