Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether Australian Vanadium (ASX:AVL) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Australian Vanadium 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. When Australian Vanadium last reported its balance sheet in June 2019, it had zero debt and cash worth AU$4.4m. Looking at the last year, the company burnt through AU$7.8m. Therefore, from June 2019 it had roughly 7 months of cash runway. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. The image below shows how its cash balance has been changing over the last few years.
How Is Australian Vanadium’s Cash Burn Changing Over Time?
Australian Vanadium didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its 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. Remarkably, it actually increased its cash burn by 255% in the last year. Given that sharp increase in spending, the company’s cash runway will shrink rapidly as it depletes its cash reserves. Admittedly, we’re a bit cautious of Australian Vanadium due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Australian Vanadium Raise Cash?
Since its cash burn is moving in the wrong direction, Australian Vanadium shareholders may wish to think ahead to when the company may need to raise more cash. 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 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.
Australian Vanadium’s cash burn of AU$7.8m is about 28% of its AU$28m market capitalisation. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
Is Australian Vanadium’s Cash Burn A Worry?
We must admit that we don’t think Australian Vanadium is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can’t ignore the fact that we consider its increasing cash burn to be downright troublesome. Once we consider the metrics mentioned in this article together, we’re left with very little confidence in the company’s ability to manage its cash burn, and we think it will probably need more money. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Australian Vanadium insiders have been trading shares in the company.
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