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, the natural question for Vonex (ASX:VN8) shareholders is whether they should be concerned by its rate of 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.
See our latest analysis for Vonex
Does Vonex Have A Long 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. When Vonex last reported its balance sheet in December 2019, it had zero debt and cash worth AU$2.6m. Looking at the last year, the company burnt through AU$1.2m. So it had a cash runway of about 2.2 years from December 2019. Arguably, that’s a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Vonex Growing?
We reckon the fact that Vonex managed to shrink its cash burn by 53% over the last year is rather encouraging. And operating revenue was up by 13%, too. It seems to be growing nicely. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Vonex has developed its business over time by checking this visualization of its revenue and earnings history.
Can Vonex Raise More Cash Easily?
There’s no doubt Vonex seems to be in a fairly good position, when it comes to managing its cash burn, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Since it has a market capitalisation of AU$19m, Vonex’s AU$1.2m in cash burn equates to about 6.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Vonex’s Cash Burn Situation?
It may already be apparent to you that we’re relatively comfortable with the way Vonex is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even though its revenue growth wasn’t quite as impressive, it was still a positive. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. Its important for readers to be cognizant of the risks that can affect the company’s operations, and we’ve picked out 4 warning signs for Vonex that investors should know when investing in the stock.
Of course Vonex may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.