There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Myomo (NYSEMKT:MYO) shareholders should be worried about its cash burn. 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. 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 Myomo

How Long Is Myomo's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Myomo last reported its balance sheet in June 2019, it had zero debt and cash worth US$6.7m. Importantly, its cash burn was US$10m over the trailing twelve months. Therefore, from June 2019 it had roughly 8 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Myomo Growing?

At first glance it's a bit worrying to see that Myomo actually boosted its cash burn by 28%, year on year. But looking on the bright side, its revenue gained by 62%, lending some credence to the growth narrative. The company needs to keep up that growth, if it is to really please shareholders. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Myomo Raise Cash?

Given the trajectory of Myomo's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.

In the last year, Myomo burned through US$10m, which is just about equal to its US$10m market cap. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

How Risky Is Myomo's Cash Burn Situation?

On this analysis of Myomo's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Myomo CEO is paid..

Of course Myomo may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.