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.
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 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is Australian Vanadium’s Cash Runway?
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. In June 2023, Australian Vanadium had AU$27m in cash, and was debt-free. Looking at the last year, the company burnt through AU$17m. So it had a cash runway of approximately 19 months from June 2023. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Is Australian Vanadium’s Cash Burn Changing Over Time?
Whilst it’s great to see that Australian Vanadium has already begun generating revenue from operations, last year it only produced AU$31k, so we don’t think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. With the cash burn rate up 39% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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.
Can Australian Vanadium Raise More Cash Easily?
Given its cash burn trajectory, Australian Vanadium shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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$17m is about 17% of its AU$99m market capitalisation. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How Risky Is Australian Vanadium’s Cash Burn Situation?
On this analysis of Australian Vanadium’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Australian Vanadium has 5 warning signs (and 3 which can’t be ignored) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.