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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Applied Graphene Materials (LON:AGM) shareholders 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. Let's start with an examination of the business' cash, relative to its cash burn.
When Might Applied Graphene Materials Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. Applied Graphene Materials has such a small amount of debt that we'll set it aside, and focus on the UK£2.3m in cash it held at January 2021. In the last year, its cash burn was UK£2.0m. That means it had a cash runway of around 14 months as of January 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Applied Graphene Materials' Cash Burn Changing Over Time?
In the last year, Applied Graphene Materials did book revenue of UK£90k, but its revenue from operations was less, at just UK£90k. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. Even though it doesn't get us excited, the 48% reduction in cash burn year on year does suggest the company can continue operating for quite some time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Applied Graphene Materials Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Applied Graphene Materials to raise more cash in the future. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Applied Graphene Materials' cash burn of UK£2.0m is about 12% of its UK£17m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Applied Graphene Materials' Cash Burn A Worry?
The good news is that in our view Applied Graphene Materials' cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong cash burn reduction. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Applied Graphene Materials has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.
Of course Applied Graphene Materials 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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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