We're Hopeful That Applied Graphene Materials (LON:AGM) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Applied Graphene Materials (LON:AGM) shareholders have done very well over the last year, with the share price soaring by 165%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Applied Graphene Materials shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Applied Graphene Materials

Does Applied Graphene Materials Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at July 2020, Applied Graphene Materials had cash of UK£3.7m and no debt. Importantly, its cash burn was UK£2.5m over the trailing twelve months. Therefore, from July 2020 it had roughly 18 months of cash runway. Importantly, though, the one analyst we see covering the stock thinks that Applied Graphene Materials will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Is Applied Graphene Materials' Cash Burn Changing Over Time?

In the last year, Applied Graphene Materials did book revenue of UK£83k, but its revenue from operations was less, at just UK£83k. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. Even though it doesn't get us excited, the 43% reduction in cash burn year on year does suggest the company can continue operating for quite some time. 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 Applied Graphene Materials To Raise More Cash For Growth?

While Applied Graphene Materials 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Applied Graphene Materials' cash burn of UK£2.5m is about 12% of its UK£21m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Applied Graphene Materials' Cash Burn?

As you can probably tell by now, we're not too worried about Applied Graphene Materials' cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. And even though its cash runway wasn't quite as impressive, it was still a positive. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Applied Graphene Materials has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course Applied Graphene Materials 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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