We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Vanadium Resources (ASX:VR8) 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.
How Long Is Vanadium Resources’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, Vanadium Resources had AU$630k in cash, and was debt-free. In the last year, its cash burn was AU$3.1m. Therefore, from December 2019 it had roughly 2 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. However, if we extrapolate the company’s recent cash burn trend, then it would have a longer cash run way. Depicted below, you can see how its cash holdings have changed over time.
How Is Vanadium Resources’s Cash Burn Changing Over Time?
Although Vanadium Resources reported revenue of AU$2.9k last year, it didn’t actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. As it happens, the company’s cash burn reduced by 7.9% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Vanadium Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Vanadium Resources Raise More Cash Easily?
While Vanadium Resources 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Vanadium Resources has a market capitalisation of AU$4.9m and burnt through AU$3.1m last year, which is 64% of the company’s market value. Given how large that cash burn is, relative to the market value of the entire company, we’d consider it to be a high risk stock, with the real possibility of extreme dilution.
How Risky Is Vanadium Resources’s Cash Burn Situation?
There are no prizes for guessing that we think Vanadium Resources’s cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its cash burn reduction is also a concern, and considering everything mentioned above, we’re struggling to find much to be optimistic about. The measures we’ve considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. Taking a deeper dive, we’ve spotted 6 warning signs for Vanadium Resources you should be aware of, and 4 of them shouldn’t be ignored.
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