Will Absolicon Solar Collector (NGM:ABSL B) Spend Its Cash Wisely?

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Absolicon Solar Collector (NGM:ABSL B) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Our analysis indicates that ABSL B is potentially overvalued!

When Might Absolicon Solar Collector Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Absolicon Solar Collector last reported its balance sheet in June 2022, it had zero debt and cash worth kr89m. Looking at the last year, the company burnt through kr66m. Therefore, from June 2022 it had roughly 16 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Is Absolicon Solar Collector's Cash Burn Changing Over Time?

In our view, Absolicon Solar Collector doesn't yet produce significant amounts of operating revenue, since it reported just kr14m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. During the last twelve months, its cash burn actually ramped up 91%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Absolicon Solar Collector is building its business over time.

Can Absolicon Solar Collector Raise More Cash Easily?

While Absolicon Solar Collector 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Absolicon Solar Collector has a market capitalisation of kr273m and burnt through kr66m last year, which is 24% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Absolicon Solar Collector's Cash Burn Situation?

On this analysis of Absolicon Solar Collector's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Absolicon Solar Collector (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course Absolicon Solar Collector 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.