Companies Like Vital Metals (ASX:VML) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Vital Metals (ASX:VML) has seen its share price rise 121% over the last year, delighting many shareholders. 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 its strong share price performance, we think it's worthwhile for Vital Metals shareholders to consider whether its cash burn is concerning. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Vital Metals

When Might Vital Metals Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, Vital Metals had cash of AU$35m and no debt. Looking at the last year, the company burnt through AU$16m. That means it had a cash runway of about 2.2 years as of June 2021. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Is Vital Metals' Cash Burn Changing Over Time?

Because Vital Metals 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. The skyrocketing cash burn up 134% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Admittedly, we're a bit cautious of Vital Metals due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Vital Metals Raise More Cash Easily?

While Vital Metals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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).

Vital Metals has a market capitalisation of AU$267m and burnt through AU$16m last year, which is 6.0% of the company's 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 Vital Metals' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Vital Metals' cash burn relative to its market cap was relatively promising. 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. Taking a deeper dive, we've spotted 4 warning signs for Vital Metals you should be aware of, and 3 of them are a bit concerning.

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)

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.