We Think Zinc8 Energy Solutions (CSE:ZAIR) Can Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Zinc8 Energy Solutions (CSE:ZAIR) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Zinc8 Energy Solutions

How Long Is Zinc8 Energy Solutions' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, Zinc8 Energy Solutions had CA$15m in cash, and was debt-free. Importantly, its cash burn was CA$6.1m over the trailing twelve months. So it had a cash runway of about 2.4 years from June 2021. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Is Zinc8 Energy Solutions' Cash Burn Changing Over Time?

Because Zinc8 Energy Solutions 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 136% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Admittedly, we're a bit cautious of Zinc8 Energy Solutions due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Zinc8 Energy Solutions To Raise More Cash For Growth?

While Zinc8 Energy Solutions 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of CA$49m, Zinc8 Energy Solutions' CA$6.1m in cash burn equates to about 12% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Zinc8 Energy Solutions' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Zinc8 Energy Solutions' cash runway was relatively promising. 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 Zinc8 Energy Solutions' situation. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Zinc8 Energy Solutions (3 are concerning!) that you should be aware of before investing here.

Of course Zinc8 Energy 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.

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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.
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