Weebit Nano (ASX:WBT) Is In A Strong Position To Grow Its Business

We can readily understand why investors are attracted to unprofitable companies. Indeed, Weebit Nano (ASX:WBT) stock is up 225% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Weebit Nano's cash burn is. 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 Weebit Nano

SWOT Analysis for Weebit Nano

How Long Is Weebit Nano's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, Weebit Nano had AU$46m in cash, and was debt-free. Importantly, its cash burn was AU$12m over the trailing twelve months. So it had a cash runway of about 3.7 years from December 2022. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Is Weebit Nano's Cash Burn Changing Over Time?

Because Weebit Nano 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. With cash burn dropping by 16% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Weebit Nano 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 Weebit Nano Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Weebit Nano 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. 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.

Weebit Nano's cash burn of AU$12m is about 1.0% of its AU$1.2b 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.

Is Weebit Nano's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Weebit Nano's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn't too bad! After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking a deeper dive, we've spotted 5 warning signs for Weebit Nano you should be aware of, and 2 of them are a bit unpleasant.

Of course Weebit Nano 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. 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.