We’re keeping an eye on DermTech’s (NASDAQ:DMTK) cash burn rate

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Just because a company isn’t making money doesn’t mean the stock will go down. 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. But while the success stories are well known, investors shouldn’t ignore the many, many unprofitable companies that simply burn all their money and crash.

So the natural question for dermtech (NASDAQ:DMTK) shareholders is whether they should be concerned about its cash burn rate. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.

Discover our latest analysis for DermTech

When could DermTech run out of money?

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 consumption. As of March 2022, DermTech had cash of US$199 million and no debt. Importantly, its cash burn has been US$80 million over the past twelve months. Therefore, as of March 2022, it had 2.5 years of cash trail. That’s decent, giving the company a few years to grow its business. The image below shows how his cash balance has changed over the past few years.

NasdaqCM: DMTK Debt to Equity June 4, 2022

How is DermTech growing?

Notably, DermTech has actually increased its cash burn very hard and fast over the past year, by 136%, which signifies a significant investment in the business. While this certainly gives us food for thought, we are very reassured by the strong annual revenue growth of 90%. Overall, we would say the company is improving over time. While the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.

Can DermTech raise more money easily?

DermTech seems to be in a pretty good position, in terms of cash burn, but we still think it’s worth considering how easily it could raise more cash if it wanted to. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their 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.

DermTech’s cash burn of US$80 million represents approximately 42% of its market capitalization of US$190 million. From this perspective, it looks like the company has spent a huge sum relative to its market value, and we’d be very wary of a painful fundraiser.

So should we be worried about DermTech’s cash burn?

On this analysis of DermTech’s cash burn, we think its revenue growth was reassuring, while its growing cash burn worries us a bit. We don’t think its cash burn is particularly problematic, but after considering the range of factors discussed in this article, we think shareholders should monitor its evolution over time. A thorough examination of the risks revealed 3 warning signs for DermTech readers should consider before committing capital to this title.

Sure DermTech may not be the best stock to buy. So you might want to see this free collection of companies offering a high return on equity, or this 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 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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