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, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed.   Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for QuantumScape (NYSE:QS) shareholders is whether they should be concerned by its rate of cash burn.   For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow.  The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

When Might QuantumScape Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn.   In June 2024, QuantumScape had US$938m in cash, and was debt-free.   Looking at the last year, the company burnt through US$308m.   So it had a cash runway of about 3.0 years from June 2024.     A runway of this length affords the company the time and space it needs to develop the business.    Depicted below, you can see how its cash holdings have changed over time.

NYSE:QS Debt to Equity History August 25th 2024

How Is QuantumScape's Cash Burn Changing Over Time?

Because QuantumScape isn't currently generating revenue, we consider it an early-stage business.  So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time.      As it happens, the company's cash burn reduced by 20% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending.     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 QuantumScape To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for QuantumScape to raise more cash in the future.    Companies can raise capital through either debt or equity.  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.

QuantumScape has a market capitalisation of US$3.1b and burnt through US$308m last year, which is 10.0% of the company's market value.    Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.  

So, Should We Worry About QuantumScape's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way QuantumScape is burning through its cash.  For example, we think its cash runway suggests that the company is on a good path.   Its weak point is its cash burn reduction, but even that wasn't too bad!     After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term.     On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for QuantumScape (1 is significant!) that you should be aware of before investing here.  

Of course QuantumScape may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.