Here's Why Greenstar Biosciences (CSE:GSTR) Must Use Its Cash Wisely
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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Greenstar Biosciences (CSE:GSTR) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Greenstar Biosciences
How Long Is Greenstar Biosciences's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In November 2019, Greenstar Biosciences had CA$271k in cash, and was debt-free. In the last year, its cash burn was CA$2.3m. So it had a cash runway of approximately 1 months from November 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is Greenstar Biosciences's Cash Burn Changing Over Time?
Whilst it's great to see that Greenstar Biosciences has already begun generating revenue from operations, last year it only produced CA$746k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The 78% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. Admittedly, we're a bit cautious of Greenstar Biosciences due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Greenstar Biosciences Raise Cash?
While we're comforted by the recent reduction evident from our analysis of Greenstar Biosciences's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Greenstar Biosciences's cash burn of CA$2.3m is about 84% of its CA$2.7m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is Greenstar Biosciences's Cash Burn A Worry?
As you can probably tell by now, we're rather concerned about Greenstar Biosciences's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. But the silver lining was its cash burn reduction, which was encouraging. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Greenstar Biosciences (of which 3 are a bit unpleasant!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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