We Think ZEN Graphene Solutions (CVE:ZEN) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. For example, ZEN Graphene Solutions (CVE:ZEN) shareholders have done very well over the last year, with the share price soaring by 383%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether ZEN Graphene Solutions'cash burn is too risky For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for ZEN Graphene Solutions

When Might ZEN Graphene Solutions Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In September 2020, ZEN Graphene Solutions had CA$2.2m in cash, and was debt-free. In the last year, its cash burn was CA$2.8m. Therefore, from September 2020 it had roughly 10 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 ZEN Graphene Solutions' Cash Burn Changing Over Time?

Because ZEN Graphene Solutions 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. Given the length of the cash runway, we'd interpret the 25% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. 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.

How Hard Would It Be For ZEN Graphene Solutions To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for ZEN Graphene Solutions to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

ZEN Graphene Solutions has a market capitalisation of CA$149m and burnt through CA$2.8m last year, which is 1.9% of the company's market value. 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.

So, Should We Worry About ZEN Graphene Solutions' Cash Burn?

On this analysis of ZEN Graphene Solutions' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. 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 ZEN Graphene Solutions' situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for ZEN Graphene Solutions (of which 1 is a bit unpleasant!) you should know about.

Of course ZEN Graphene 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. 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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