Is Aeva Technologies (NYSE:AEVA) In A Good Position To Invest In Growth?

We can readily understand why investors are attracted to unprofitable companies. 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.

Given this risk, we thought we'd take a look at whether Aeva Technologies (NYSE:AEVA) shareholders should be worried about its cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Aeva Technologies

When Might Aeva Technologies 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. As at June 2023, Aeva Technologies had cash of US$261m and no debt. Looking at the last year, the company burnt through US$121m. So it had a cash runway of about 2.2 years from June 2023. Importantly, analysts think that Aeva Technologies will reach cashflow breakeven in 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Aeva Technologies Growing?

Some investors might find it troubling that Aeva Technologies is actually increasing its cash burn, which is up 3.6% in the last year. The fact that operating revenue was down 62% only gives us further disquiet. Considering both these metrics, we're a little concerned about how the company is developing. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Aeva Technologies Raise More Cash Easily?

Aeva Technologies seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Since it has a market capitalisation of US$168m, Aeva Technologies' US$121m in cash burn equates to about 72% of its market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

So, Should We Worry About Aeva Technologies' Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Aeva Technologies' cash runway was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. An in-depth examination of risks revealed 4 warning signs for Aeva Technologies that readers should think about before committing capital to this stock.

Of course Aeva Technologies 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.