Here's Why We're Watching Augwind Energy Tech Storage's (TLV:AUGN) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Augwind Energy Tech Storage (TLV:AUGN) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

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When Might Augwind Energy Tech Storage Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Augwind Energy Tech Storage last reported its balance sheet in June 2022, it had zero debt and cash worth ₪111m. Looking at the last year, the company burnt through ₪59m. So it had a cash runway of approximately 23 months from June 2022. 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 Augwind Energy Tech Storage's Cash Burn Changing Over Time?

Whilst it's great to see that Augwind Energy Tech Storage has already begun generating revenue from operations, last year it only produced ₪2.1m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. During the last twelve months, its cash burn actually ramped up 93%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Admittedly, we're a bit cautious of Augwind Energy Tech Storage due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Augwind Energy Tech Storage Raise More Cash Easily?

While Augwind Energy Tech Storage does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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.

Augwind Energy Tech Storage's cash burn of ₪59m is about 60% of its ₪98m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

Is Augwind Energy Tech Storage's Cash Burn A Worry?

On this analysis of Augwind Energy Tech Storage's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Augwind Energy Tech Storage's cash burn is a risk, based on the factors we mentioned in this article. On another note, Augwind Energy Tech Storage has 5 warning signs (and 3 which are concerning) we think you should know about.

Of course Augwind Energy Tech Storage 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. 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.