Even if a company is losing money, shareholders can still make money if they buy a good company at the right price. For example, biotechnology and mining exploration companies often lose money for years before they have success with discovering a new treatment or mineral. That said, unprofitable companies are risky because they can burn through all their cash and go into distress.
That's what you should do Ecograph (ASX:EGR) shareholders should be worried about the company's cash burn? For the purpose of this article, we'll define cash burn as annual (negative) free cash flow – the amount a company spends each year to fund growth. The first step is to compare the cash burn with its cash reserves to find the 'cash runway'.
Check out our latest analysis for EcoGraf
Does EcoGraf have a long-term cash runway?
A company's cash runway is the time it would take to burn through its cash reserves at its current cash burn rate. As of December 2023, EcoGraf has A$30m in cash and no debt. Its cash burn last year was A$13m. So it has a cash runway of 2.4 years from December 2023. Arguably, this is a prudent and reasonable runway length. You can see how its cash balance has changed over time in the image below.
How has EcoGraf's cash burn changed over time?
EcoGraf didn't record any revenue in the past year, indicating that it's an early-stage company that's still developing its operations. Still, we can look at its cash burn trajectory as part of assessing its cash burn situation. Over the past year, cash burn has actually increased by 31%, indicating that management is increasing investments in future growth, but not too rapidly. This isn't necessarily a bad thing, but investors should be mindful of the fact that the cash runway is getting shorter. Admittedly, EcoGraf doesn't have significant operating revenues, which makes us a bit cautious. That's why we generally prefer stocks on this list of stocks where analysts are forecasting growth.
How easily can EcoGraf raise funds?
While EcoGraf certainly has a steady cash runway, the company's cash burn trajectory may have some shareholders thinking ahead to when the company will need to raise more capital. Companies can raise capital through either debt or equity. One of the main advantages that publicly traded companies have is that they can sell shares to investors to raise cash to fund growth. By comparing a company's annual cash burn to its total market capitalization, we can roughly estimate how many shares would need to be issued (at the same burn rate) to run the company for another year.
EcoGraf's cash burn of A$13m represents roughly 17% of its market capitalization of A$73m. As a result, despite some dilution, we expect the company will have no trouble raising more cash for growth.
Are you worried about EcoGraf's cash burn?
While the rising cash burn is a bit worrying, we have to say that we thought Ecograph's cash runway was relatively promising. We're the type of investors who are always a bit worried about the risks associated with cash-burning companies, but the metrics we've discussed in this article make us feel relatively comfortable about Ecograph's situation. Apart from that, we'll look at the various risks affecting the company and 3 warning signs for EcoGraf (Two of which are concerns!) Things you should know.
of course, You may find a great investment by looking elsewhere. Take a look at this free A list of interesting companies and growth stocks according to analysts' forecasts
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
