Is ZEN Graphene Solutions (CVE:ZEN) In A Good Position To Deliver On Growth Plans?

Just because a business does not make any money, does not mean that the stock will go down. By way of example, ZEN Graphene Solutions (CVE:ZEN) has seen its share price rise 641% over the last year, delighting many shareholders. 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.

In light of its strong share price run, we think now is a good time to investigate how risky ZEN Graphene Solutions' cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for ZEN Graphene Solutions

How Long Is ZEN Graphene Solutions' Cash Runway?

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. As at June 2021, ZEN Graphene Solutions had cash of CA$4.5m and no debt. Looking at the last year, the company burnt through CA$4.7m. Therefore, from June 2021 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. The image below shows how its cash balance has been changing over the last few years.

How Is ZEN Graphene Solutions' Cash Burn Changing Over Time?

ZEN Graphene Solutions didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. In fact, it ramped its spending strongly over the last year, increasing cash burn by 104%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. ZEN Graphene Solutions makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can ZEN Graphene Solutions Raise More Cash Easily?

Since its cash burn is moving in the wrong direction, ZEN Graphene Solutions shareholders may wish to think ahead to when the company may need to raise more cash. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

ZEN Graphene Solutions' cash burn of CA$4.7m is about 1.8% of its CA$261m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is ZEN Graphene Solutions' Cash Burn Situation?

On this analysis of ZEN Graphene Solutions' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, ZEN Graphene Solutions has 4 warning signs (and 2 which make us uncomfortable) 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.
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