Companies Like Bright Minds Biosciences (CSE:DRUG) Can Afford To Invest In Growth

Simply Wall St · 10/16 11:18

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Bright Minds Biosciences (CSE:DRUG) has seen its share price rise 1,971% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

In light of its strong share price run, we think now is a good time to investigate how risky Bright Minds Biosciences' cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Bright Minds Biosciences

When Might Bright Minds Biosciences Run Out Of Money?

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 June 2024, Bright Minds Biosciences had CA$6.2m in cash, and was debt-free. Looking at the last year, the company burnt through CA$2.6m. That means it had a cash runway of about 2.4 years as of June 2024. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
CNSX:DRUG Debt to Equity History October 16th 2024

How Is Bright Minds Biosciences' Cash Burn Changing Over Time?

Because Bright Minds Biosciences isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Notably, its cash burn was actually down by 68% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Admittedly, we're a bit cautious of Bright Minds 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.

Can Bright Minds Biosciences Raise More Cash Easily?

There's no doubt Bright Minds Biosciences' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Since it has a market capitalisation of CA$197m, Bright Minds Biosciences' CA$2.6m in cash burn equates to about 1.3% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is Bright Minds Biosciences' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Bright Minds Biosciences' cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even its cash runway was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking a deeper dive, we've spotted 4 warning signs for Bright Minds Biosciences you should be aware of, and 3 of them are a bit unpleasant.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.