Stock Analysis

We're Not Very Worried About Digital Wine Ventures' (ASX:DW8) Cash Burn Rate

ASX:KDY
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Just because a business does not make any money, does not mean that the stock will go down. For example, Digital Wine Ventures (ASX:DW8) shareholders have done very well over the last year, with the share price soaring by 840%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

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 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.

Check out our latest analysis for Digital Wine Ventures

When Might Digital Wine Ventures Run Out Of Money?

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 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. That means it had a cash runway of about 2.0 years as of December 2020. 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. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:DW8 Debt to Equity History June 14th 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. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 156% 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. 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. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Digital Wine Ventures' cash burn of AU$3.4m is about 2.2% of its AU$157m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Digital Wine Ventures' Cash Burn?

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. An in-depth examination of risks revealed 3 warning signs for Digital Wine Ventures that readers should think about before committing capital to this stock.

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)

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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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