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Companies Like Graphene 3D Lab (CVE:GGG) Can Be Considered Quite Risky

Simply Wall St

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Graphene 3D Lab (CVE:GGG) 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'. Let's start with an examination of the business's cash, relative to its cash burn.

See our latest analysis for Graphene 3D Lab

How Long Is Graphene 3D Lab's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at February 2019, Graphene 3D Lab had cash of US$116k and no debt. In the last year, its cash burn was US$497k. Therefore, from February 2019 it had roughly 3 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. You can see how its cash balance has changed over time in the image below.

TSXV:GGG Historical Debt, September 25th 2019
TSXV:GGG Historical Debt, September 25th 2019

How Is Graphene 3D Lab's Cash Burn Changing Over Time?

In our view, Graphene 3D Lab doesn't yet produce significant amounts of operating revenue, since it reported just US$970k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Given the length of the cash runway, we'd interpret the 38% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we're a bit cautious of Graphene 3D Lab 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 Graphene 3D Lab Raise More Cash Easily?

While Graphene 3D Lab is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Graphene 3D Lab's cash burn of US$497k is about 17% of its CA$3.9m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Graphene 3D Lab's Cash Burn A Worry?

On this analysis of Graphene 3D Lab's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. 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: Graphene 3D Lab 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.