Is Graphene Manufacturing Group (CVE:GMG) In A Good Position To Deliver On Growth Plans?

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Graphene Manufacturing Group (CVE:GMG) shareholders be worried about its 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Graphene Manufacturing Group

How Long Is Graphene Manufacturing Group's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Graphene Manufacturing Group has such a small amount of debt that we'll set it aside, and focus on the AU$4.0m in cash it held at June 2024. Looking at the last year, the company burnt through AU$7.7m. So it had a cash runway of approximately 6 months from June 2024. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

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

In the last year, Graphene Manufacturing Group did book revenue of AU$6.2m, but its revenue from operations was less, at just AU$295k. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. Given the length of the cash runway, we'd interpret the 45% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

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

While Graphene Manufacturing Group 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. 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. 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.

Graphene Manufacturing Group's cash burn of AU$7.7m is about 11% of its AU$68m market capitalisation. 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 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. Summing up, we think the Graphene Manufacturing Group's cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Graphene Manufacturing Group (of which 2 shouldn't be ignored!) you should know about.

Of course Graphene Manufacturing Group 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 with high insider ownership.

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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.