We think Electrameccanica Vehicles (NASDAQ:SOLO) needs to carefully drive business growth

We can easily understand why investors are attracted to unprofitable companies. For example, even though Amazon.com was loss-making for many years after going public, if you had bought and held the stock since 1999, you would have made a fortune. Even so, only a fool would ignore the risk of a loss-making company spending its money too quickly.

So, a natural question for Electrameccanica Vehicles (NASDAQ:SOLO) shareholders should be concerned about its cash burn rate. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as ‘cash burn’. We’ll start by comparing his cash spending to his cash reserves to calculate his cash flow.

Check out our latest analysis for Electrameccanica Vehicles

How long is the Electrameccanica Vehicles cash runway?

A company’s cash takeoff is the time it would take to burn through its cash reserves at the current rate of cash burn. As of September 2022, Electrameccanica Vehicles had US$154 million in cash and was debt-free. Last year, its cash spending amounted to 83 million US dollars. Therefore, as of September 2022, he had approximately 22 months of cash. It’s important to note that one analyst we see covering the stock thinks Electrameccanica Vehicles will hit cash flow break even in 3 years. In essence, this means that the company will either cut back on spending money or need more money. In the figure below, you can see how the cash balance has changed over time.

debt-equity history analysis
NasdaqCM: SOLO Debt-to-Equity History January 12, 2023

How does spending money in Electrameccanica vehicles change over time?

In our view, Electrameccanica Vehicles is still not generating significant amounts of operating income, having only reported $5.5 million over the past twelve months. As a result, we think it’s a bit early to focus on income growth, so we’ll limit ourselves to looking at how spending money changes over time. With a cash burn rate up 35% in the past year, the company appears to be increasing investment in the business over time. However, the company’s true cash line will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, the future is most important of all. For this reason, it makes a lot of sense to look at our analyst forecasts for the company.

How easily can Electrameccanica vehicles collect cash?

Given its cash-burning trajectory, Electrameccanica Vehicles shareholders may want to consider how it could easily raise more cash, despite solid cash. Companies can raise capital through debt or equity. One of the main advantages that publicly listed companies have is that they can sell shares to investors to raise money and finance growth. By looking at a company’s cash flow relative to its market capitalization, we get a sense of how diluted shareholders would be if the company were to raise enough cash to cover another year’s cash flow.

Electrameccanica Vehicles’ cash of $83 million is about 69% of its market capitalization of $120 million. Given how big that cash burn is, relative to the market value of the entire company, we’d consider it a high-risk stock, with a real possibility of extreme dilution.

Is the Electrameccanica vehicle cash drain a concern?

While its cash flow relative to its market cap makes us a little nervous, we’re compelled to mention that we thought Electrameccanica Vehicles’ cash line was relatively promising. Shareholders can be encouraged by the fact that at least one analyst predicts that a break-even point will be reached. Looking at the factors mentioned in this short report, we think his spending money is a bit risky and makes us a little nervous about the stock. An in-depth review of risks are revealed 2 warning signs for Electrameccanica vehicles which readers should consider before investing capital in this stock.

If you’d rather check out another company with better fundamentals, don’t miss this one free a list of interesting companies that have a HIGH return on equity and low debt or this list of stocks that are predicted to grow.

Valuation is complex, but we help make it simple.

Find out if Electrameccanica Vehicles is potentially overrated or underrated by checking our extensive analysis, which includes fair value estimates, risks and caveats, dividends, preferential transactions and financial health.

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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 as financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the company’s latest price-sensitive announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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