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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should EAM Solar (OB:EAM) 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.
Does EAM Solar Have A Long Cash Runway?
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. In September 2019, EAM Solar had €92k in cash, and was debt-free. In the last year, its cash burn was €62k. Therefore, from September 2019 it had roughly 18 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 EAM Solar's Cash Burn Changing Over Time?
In our view, EAM Solar doesn't yet produce significant amounts of operating revenue, since it reported just €3.7m 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. From a cash flow perspective, it's great to see the company's cash burn dropped by 93% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we're a bit cautious of EAM Solar due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can EAM Solar Raise More Cash Easily?
While we're comforted by the recent reduction evident from our analysis of EAM Solar's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.
EAM Solar has a market capitalisation of €8.1m and burnt through €62k last year, which is 0.8% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is EAM Solar's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way EAM Solar is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. Its weak point is its cash runway, but even that wasn't too bad! Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. 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: EAM Solar insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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