Is Electrameccanica Vehicles (NASDAQ:SOLO) In A Good Position To Invest In Growth?

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 Electrameccanica Vehicles (NASDAQ:SOLO) 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Electrameccanica Vehicles

How Long Is Electrameccanica Vehicles' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Electrameccanica Vehicles last reported its balance sheet in March 2023, it had zero debt and cash worth US$111m. Looking at the last year, the company burnt through US$82m. Therefore, from March 2023 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 Well Is Electrameccanica Vehicles Growing?

At first glance it's a bit worrying to see that Electrameccanica Vehicles actually boosted its cash burn by 7.7%, year on year. Given that its operating revenue increased 112% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. We think it is growing rather well, upon reflection. 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.

Can Electrameccanica Vehicles Raise More Cash Easily?

While Electrameccanica Vehicles seems to be in a fairly good position, 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. Many companies end up issuing new shares to fund future 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.

Electrameccanica Vehicles has a market capitalisation of US$94m and burnt through US$82m last year, which is 87% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

Is Electrameccanica Vehicles' Cash Burn A Worry?

On this analysis of Electrameccanica Vehicles' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Electrameccanica Vehicles' cash burn is a risk, based on the factors we mentioned in this article. On another note, Electrameccanica Vehicles has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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