Here's Why We're Not Too Worried About EcoGraf's (ASX:EGR) Cash Burn Situation

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether EcoGraf (ASX:EGR) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. 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 EcoGraf

How Long Is EcoGraf's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, EcoGraf had cash of AU$47m and no debt. In the last year, its cash burn was AU$6.2m. That means it had a cash runway of about 7.6 years as of June 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Is EcoGraf's Cash Burn Changing Over Time?

Because EcoGraf isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The skyrocketing cash burn up 125% year on year certainly tests our nerves. That sort of ramp in expenditure is no doubt intended to generate worthwhile long term returns. Admittedly, we're a bit cautious of EcoGraf due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can EcoGraf Raise More Cash Easily?

While EcoGraf does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of AU$169m, EcoGraf's AU$6.2m in cash burn equates to about 3.6% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is EcoGraf's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way EcoGraf is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. An in-depth examination of risks revealed 2 warning signs for EcoGraf that readers should think about before committing capital to this stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.