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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we’d take a look at whether Australian Vanadium (ASX:AVL) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
View our latest analysis for Australian Vanadium
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. As at June 2022, Australian Vanadium had cash of AU$26m and no debt. In the last year, its cash burn was AU$12m. Therefore, from June 2022 it had 2.1 years of cash runway. That’s decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.
How Is Australian Vanadium’s Cash Burn Changing Over Time?
Because Australian Vanadium 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. Over the last year its cash burn actually increased by a very significant 58%. While this spending increase is no doubt intended to drive growth, if the trend continues the company’s cash runway will shrink very quickly. Admittedly, we’re a bit cautious of Australian Vanadium due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
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