We Think Electrameccanica Vehicles (NASDAQ:SOLO) Needs To Drive Business Growth Carefully
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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
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. As at March 2023, Electrameccanica Vehicles had cash of US$111m and no debt. In the last year, its cash burn was US$82m. That means it had a cash runway of around 16 months as of March 2023. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Electrameccanica Vehicles Growing?
Some investors might find it troubling that Electrameccanica Vehicles is actually increasing its cash burn, which is up 7.7% in the last 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 revenue is maintained once spending on growth decreases, that could well pay off! It seems to be growing nicely. 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.
How Hard Would It Be For Electrameccanica Vehicles To Raise More Cash For Growth?
Electrameccanica Vehicles 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. 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.
In the last year, Electrameccanica Vehicles burned through US$82m, which is just about equal to its US$81m market cap. That suggests the company may have some funding difficulties, and we'd be very wary of 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. Taking a deeper dive, we've spotted 3 warning signs for Electrameccanica Vehicles you should be aware of, and 1 of them is significant.
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.
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