Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
So the natural question for dermtech (NASDAQ:DMTK) shareholders is whether they should be concerned about its cash burn rate. In this report, we will consider the company’s negative annual free cash flow, which we will now refer to as “cash burn”. Let’s start with a review of the company’s cash flow, relative to its cash burn.
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Does DermTech have a long cash trail?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. When DermTech last published its balance sheet in June 2022, it had no debt and cash worth $174 million. Looking at last year, the company burned US$91 million. Therefore, as of June 2022, he had around 23 months of cash. While this cash trail isn’t too much of a concern, sane holders would look away and consider what would happen if the company ran out of cash. You can see how his cash balance has changed over time in the image below.
How is DermTech growing?
Notably, DermTech has actually increased its cash burn very hard and fast over the past year, by 127%, which signifies a significant investment in the business. Although it’s a bit concerning at a glance, the company has a history of recent growth, as evidenced by its impressive 55% revenue growth in the same year. Considering the above factors, the company does not fare badly when it comes to evaluating its evolution over time. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at the company’s expected growth over the next few years.
Can DermTech raise more money easily?
Even though it looks like DermTech 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 cap, we get 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.
DermTech’s cash burn of US$91 million represents approximately 85% of its market capitalization of US$107 million. Given the magnitude of these expenses relative to the market value of the business, we believe there is a high risk of funding difficulties, and we would be very nervous about owning the stock.
Is DermTech’s cash burn a concern?
On this analysis of DermTech’s cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap worries us a bit. In summary, we think DermTech’s cash burn is a risk, based on the factors we’ve mentioned in this article. On a different note, we conducted a thorough investigation of the company and identified 2 warning signs for DermTech (1 makes us a little uneasy!) that you should be aware of before investing here.
If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. 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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