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 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
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). Let’s start with an examination of the business’s cash, relative to its cash burn.
When Might Australian Vanadium Run Out Of Money?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Australian Vanadium last reported its balance sheet in December 2019, it had zero debt and cash worth AU$6.2m. In the last year, its cash burn was AU$9.5m. That means it had a cash runway of around 8 months as of December 2019. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash.
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. In fact, it ramped its spending strongly over the last year, increasing cash burn by 151%. That sort of spending growth rate can’t continue for very long before it causes balance sheet weakness, generally speaking. Admittedly, we’re a bit cautious of Australian Vanadium due to its lack of significant operating revenues.
Can Australian Vanadium Raise More Cash Easily?
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. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Since it has a market capitalisation of AU$20m, Australian Vanadium’s AU$9.5m in cash burn equates to about 46% of its market value. That’s high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
So, Should We Worry About Australian Vanadium’s Cash Burn?
Australian Vanadium is not in a great position when it comes to its cash burn situation. While its cash runway wasn’t too bad, its increasing cash burn does leave us rather nervous. After considering the data discussed in this article, we don’t have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Taking a deeper dive, we’ve spotted 7 warning signs for Australian Vanadium you should be aware of, and 2 of them are potentially serious.
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