We're Not Very Worried About Applied Graphene Materials' (LON:AGM) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Applied Graphene Materials (LON:AGM) stock is up 152% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

In light of its strong share price run, we think now is a good time to investigate how risky Applied Graphene Materials' cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Applied Graphene Materials

When Might Applied Graphene Materials 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. As at January 2021, Applied Graphene Materials had cash of UK£2.3m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was UK£2.0m. So it had a cash runway of approximately 14 months from January 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

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

Although Applied Graphene Materials had revenue of UK£90k in the last twelve months, its operating revenue was only UK£90k in that time period. 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 48% over the last year suggests some degree of prudence. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Applied Graphene Materials Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Applied Graphene Materials 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Applied Graphene Materials' cash burn of UK£2.0m is about 11% of its UK£19m 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?

Applied Graphene Materials appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong cash burn reduction. 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 Applied Graphene Materials' situation. On another note, Applied Graphene Materials has 5 warning signs (and 2 which are concerning) we think you should know about.

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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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