Companies Like Graphene Manufacturing Group (CVE:GMG) Are In A Position To Invest In Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Graphene Manufacturing Group (CVE:GMG) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Graphene Manufacturing Group

When Might Graphene Manufacturing Group Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. Graphene Manufacturing Group has such a small amount of debt that we'll set it aside, and focus on the AU$4.2m in cash it held at September 2024. Looking at the last year, the company burnt through AU$4.8m. Therefore, from September 2024 it had roughly 11 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Is Graphene Manufacturing Group's Cash Burn Changing Over Time?

In our view, Graphene Manufacturing Group doesn't yet produce significant amounts of operating revenue, since it reported just AU$250k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. We'd venture that the 64% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Admittedly, we're a bit cautious of Graphene Manufacturing Group due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Graphene Manufacturing Group Raise More Cash Easily?

There's no doubt Graphene Manufacturing Group's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Graphene Manufacturing Group's cash burn of AU$4.8m is about 6.0% of its AU$81m market capitalisation. 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.

So, Should We Worry About Graphene Manufacturing Group's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Graphene Manufacturing Group's cash burn reduction 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 Graphene Manufacturing Group's situation. On another note, Graphene Manufacturing Group has 5 warning signs (and 3 which are a bit concerning) we think you should know about.

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.