Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. By way of example, ZEN Graphene Solutions (CVE:ZEN) has seen its share price rise 500% over the last year, delighting many shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So notwithstanding the buoyant share price, we think it's well worth asking whether ZEN Graphene Solutions'cash burn is too risky In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might ZEN Graphene Solutions Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2020, ZEN Graphene Solutions had cash of CA$2.2m and no debt. Importantly, its cash burn was CA$2.8m over the trailing twelve months. So it had a cash runway of approximately 10 months from September 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Is ZEN Graphene Solutions' Cash Burn Changing Over Time?
Because ZEN Graphene Solutions 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. Given the length of the cash runway, we'd interpret the 25% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. ZEN Graphene Solutions makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can ZEN Graphene Solutions Raise More Cash Easily?
While ZEN Graphene Solutions is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.
ZEN Graphene Solutions' cash burn of CA$2.8m is about 1.6% of its CA$169m market capitalisation. 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.
So, Should We Worry About ZEN Graphene Solutions' Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought ZEN Graphene Solutions' cash burn relative to its market cap was relatively promising. 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, we conducted an in-depth investigation of the company, and identified 4 warning signs for ZEN Graphene Solutions (1 can't be ignored!) that you should be aware of before investing here.
Of course ZEN Graphene Solutions 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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