We Think First Graphene (ASX:FGR) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether First Graphene (ASX:FGR) 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 First Graphene

How Long Is First Graphene's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2020, First Graphene had AU$8.1m in cash, and was debt-free. Importantly, its cash burn was AU$5.9m over the trailing twelve months. So it had a cash runway of approximately 16 months from June 2020. 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. The image below shows how its cash balance has been changing over the last few years.

How Is First Graphene's Cash Burn Changing Over Time?

In our view, First Graphene doesn't yet produce significant amounts of operating revenue, since it reported just AU$290k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With cash burn dropping by 5.0% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. First Graphene 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.

How Hard Would It Be For First Graphene To Raise More Cash For Growth?

While First Graphene 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of AU$131m, First Graphene's AU$5.9m in cash burn equates to about 4.5% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is First Graphene's Cash Burn A Worry?

First Graphene appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash runway, while on the other it can also boast very strong cash burn relative to its market cap. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about First Graphene's situation. On another note, First Graphene has 6 warning signs (and 3 which are significant) we think you should know about.

Of course First Graphene 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.

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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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