Just because a company isn’t making money doesn’t mean the stock will go down. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
Given this risk, we thought we would examine whether Health Science Guard (NASDAQ: GHSI) shareholders should be concerned about its consumption of cash. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
How long is the Guardion Health Sciences cash trail?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash burn. When Guardion Health Sciences last released its balance sheet in June 2020, it had no debt and $12 million worth of cash. Importantly, its cash burn was US$7.7 million over the last twelve months. So there was a cash trail of about 18 months from June 2020. While that cash trail isn’t too much of a concern, sane holders would look away and consider what would happen if the business ran out of cash. silver. You can see how his cash balance has changed over time in the image below.
How is Guardion Health Sciences growing?
Guardion Health Sciences has significantly increased its investments over the past year, with cash burn up 74%. While this certainly gives us food for thought, we are very reassured by the strong annual revenue growth of 77%. Overall, we would say the company is improving over time. Of course, we’ve only taken a look at the stock’s growth metrics here. You can see how Guardion Health Sciences is growing its revenue over time by checking out this visualization of past revenue growth.
How easily can Guardion Health Sciences raise funds?
Even though it looks like Guardion Health Sciences is growing its business well, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital either through debt or equity. Typically, a company will sell new stock on its own to raise cash and drive growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
Guardion Health Sciences’ cash burn of $7.7 million is about 38% of its market capitalization of $20 million. That’s a pretty notable cash burn, so if the company were to sell stock to cover another year’s cost of operations, shareholders would suffer costly dilution.
How risky is Guardion Health Sciences’ cash burn situation?
On this analysis of Guardion Health Sciences’ cash burn, we think its revenue growth was reassuring, while its growing cash burn worries us a bit. While we don’t think it has a problem with its cash burn, the analysis we’ve done in this article suggests that shareholders should think carefully about the potential cost of raising more money in the future. Separately, we looked at different risks affecting the business and identified 5 warning signs for Guardion Health Sciences (2 of which are a bit of a concern!) that you should know about.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)
This Simply Wall St article is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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