Here's Why We're Watching Zinnwald Lithium's (LON:ZNWD) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Zinnwald Lithium (LON:ZNWD) shareholders is whether they should be concerned by its rate of cash burn. 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 Zinnwald Lithium

SWOT Analysis for Zinnwald Lithium

How Long Is Zinnwald Lithium's 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. When Zinnwald Lithium last reported its balance sheet in December 2022, it had zero debt and cash worth €3.2m. Looking at the last year, the company burnt through €5.1m. So it had a cash runway of approximately 8 months from December 2022. Importantly, the one analyst we see covering the stock thinks that Zinnwald Lithium will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

How Is Zinnwald Lithium's Cash Burn Changing Over Time?

Because Zinnwald Lithium 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. Its cash burn positively exploded in the last year, up 240%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Zinnwald Lithium Raise Cash?

Given its cash burn trajectory, Zinnwald Lithium shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. 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).

Zinnwald Lithium has a market capitalisation of €68m and burnt through €5.1m last year, which is 7.4% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Zinnwald Lithium's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Zinnwald Lithium's cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Summing up, we think the Zinnwald Lithium's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 7 warning signs for Zinnwald Lithium you should be aware of, and 4 of them shouldn't be ignored.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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. 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.