We can readily understand why investors are attracted to unprofitable companies. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Global Li-Ion Graphite (CSE:LION) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Global Li-Ion Graphite's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. Global Li-Ion Graphite has such a small amount of debt that we'll set it aside, and focus on the CA$320k in cash it held at August 2019. Looking at the last year, the company burnt through CA$1.0m. That means it had a cash runway of around 4 months as of August 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.
How Is Global Li-Ion Graphite's Cash Burn Changing Over Time?
Because Global Li-Ion Graphite isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The 70% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. Admittedly, we're a bit cautious of Global Li-Ion Graphite due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For Global Li-Ion Graphite To Raise More Cash For Growth?
There's no doubt Global Li-Ion Graphite's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Global Li-Ion Graphite has a market capitalisation of CA$2.8m and burnt through CA$1.0m last year, which is 36% 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.
Is Global Li-Ion Graphite's Cash Burn A Worry?
On this analysis of Global Li-Ion Graphite's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. 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. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Global Li-Ion Graphite insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
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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