We're Keeping An Eye On ZEN Graphene Solutions' (CVE:ZEN) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. Indeed, ZEN Graphene Solutions (CVE:ZEN) stock is up 770% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

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 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for ZEN Graphene Solutions

How Long Is ZEN Graphene Solutions' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, ZEN Graphene Solutions had cash of CA$2.1m and no debt. Looking at the last year, the company burnt through CA$3.0m. So it had a cash runway of approximately 8 months from December 2020. 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. 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. It's possible that the 12% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we're a bit cautious of ZEN Graphene Solutions due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can ZEN Graphene Solutions Raise More Cash Easily?

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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

ZEN Graphene Solutions' cash burn of CA$3.0m is about 1.2% of its CA$253m 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.

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

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought ZEN Graphene Solutions' cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for ZEN Graphene Solutions (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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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