Here's Why We're Watching Vimy Resources' (ASX:VMY) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Vimy Resources (ASX:VMY) has seen its share price rise 442% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Vimy Resources shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Vimy Resources

When Might Vimy Resources Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Vimy Resources has such a small amount of debt that we'll set it aside, and focus on the AU$4.3m in cash it held at December 2020. Looking at the last year, the company burnt through AU$5.2m. Therefore, from December 2020 it had roughly 10 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

How Is Vimy Resources' Cash Burn Changing Over Time?

Because Vimy Resources isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. As it happens, the company's cash burn reduced by 5.4% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Vimy Resources Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Vimy Resources to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of AU$86m, Vimy Resources' AU$5.2m in cash burn equates to about 6.1% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Vimy Resources' Cash Burn A Worry?

On this analysis of Vimy Resources' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway 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, we conducted an in-depth investigation of the company, and identified 7 warning signs for Vimy Resources (3 are a bit concerning!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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. 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.
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