Stock Analysis

We're Hopeful That Digital Wine Ventures (ASX:DW8) Will Use Its Cash Wisely

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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. By way of example, Digital Wine Ventures (ASX:DW8) has seen its share price rise 843% 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 Digital Wine Ventures 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Digital Wine Ventures

When Might Digital Wine Ventures Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Digital Wine Ventures last reported its balance sheet in December 2020, it had zero debt and cash worth AU$6.8m. In the last year, its cash burn was AU$3.4m. Therefore, from December 2020 it had 2.0 years of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

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ASX:DW8 Debt to Equity History February 28th 2021

How Is Digital Wine Ventures' Cash Burn Changing Over Time?

In our view, Digital Wine Ventures doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.4m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 146%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. In reality, this article only makes a short study of the company's growth data. You can take a look at how Digital Wine Ventures has developed its business over time by checking this visualization of its revenue and earnings history.

Can Digital Wine Ventures Raise More Cash Easily?

Given its cash burn trajectory, Digital Wine Ventures 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. 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 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$110m, Digital Wine Ventures' AU$3.4m in cash burn equates to about 3.1% 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.

Is Digital Wine Ventures' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Digital Wine Ventures' 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for Digital Wine Ventures that potential shareholders should take into account before putting money into a stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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. 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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