Here’s why we’re not too worried about Minerva Neurosciences’ cash burn situation (NASDAQ: NERV)
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 the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
In view of this risk, we thought to examine whether Minerva Neurosciences (NASDAQ: NERV) shareholders should be concerned about its consumption of cash. In this report, we will consider the company’s annual negative free cash flow, which we now call “cash burn”. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
Check out our latest review for Minerva Neurosciences
Does Minerva Neurosciences have a long cash flow track?
A company’s cash flow trail is calculated by dividing its cash reserve by its cash consumption. When Minerva Neurosciences last published its balance sheet in June 2021, it had no debt and cash worth $ 74 million. Looking at last year, the company burned $ 28 million. Therefore, as of June 2021, he had 2.6 years of cash flow. Notably, analysts predict that Minerva Neurosciences will break even (at the level of free cash flow) in about 4 years. This means that, unless the company quickly reduces its consumption of cash, it may well be looking to raise more cash. Pictured below, you can see how his cash holdings have changed over time.
How does Minerva Neurosciences’ money consumption change over time?
Minerva Neurosciences has not recorded any revenue over the past year, indicating that it is a start-up company that continues to grow its business. Nonetheless, we can still examine its cash consumption trajectory as part of our assessment of its cash consumption situation. While we’re not excited about it, the 30% year-over-year reduction in cash usage suggests the business can continue to operate for some time. If the past is always worth studying, it is the future that matters most. You might want to take a look at how the business is expected to grow over the next few years.
Would it be difficult for Minerva Neurosciences to raise more money for growth?
While Minerva Neurosciences 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. Businesses can raise capital through debt or equity. Many companies end up issuing new shares to fund their future 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.
Minerva Neurosciences’ cash consumption of US $ 28 million represents approximately 42% of its market capitalization of US $ 68 million. These are high expenses relative to the value of the entire company, so if it has to issue stock to fund more growth, it could end up really hurting shareholder returns (through significant dilution).
So, should we be concerned about the cash burn of Minerva Neurosciences?
Even though its consumption of cash relative to its market cap makes us a little nervous, we are forced to mention that we thought Minerva Neurosciences’ cash trail was relatively promising. A real bright spot is that analysts expect the company to break even. While we’re the type of investor that’s always a little concerned about the risks of money-burning companies, the metrics we’ve discussed in this article leave us relatively comfortable with Minerva Neurosciences’ situation. On another note, we conducted a thorough investigation of the company and identified 6 warning signs for Minerva Neurosciences (2 are significant!) That you should know before investing here.
Sure Minerva Neurosciences may not be the best stock to buy. So you might want to see this free a set of companies with a high return on equity, or that list of stocks that insiders buy.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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