Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should VR Education Holdings (ISE:6VR) shareholders 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.
See our latest analysis for VR Education Holdings
How Long Is VR Education Holdings’s Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2019, VR Education Holdings had cash of €2.2m and no debt. Importantly, its cash burn was €2.8m over the trailing twelve months. So it had a cash runway of approximately 10 months from June 2019. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is VR Education Holdings’s Cash Burn Changing Over Time?
Although VR Education Holdings had revenue of €914k in the last twelve months, its operating revenue was only €914k in that time period. We don’t think that’s enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we’ll focus on the cash burn, today. Over the last year its cash burn actually increased by 44%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can VR Education Holdings Raise Cash?
Since its cash burn is moving in the wrong direction, VR Education Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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.
VR Education Holdings’s cash burn of €2.8m is about 14% of its €20m 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.
Is VR Education Holdings’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought VR Education Holdings’s cash burn relative to its market cap was relatively promising. Summing up, we think the VR Education Holdings’s cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that VR Education Holdings insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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