We Think Volt Power Group (ASX:VPR) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Volt Power Group (ASX:VPR) stock is up 200% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Volt Power Group's cash burn is too risky. 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.

See our latest analysis for Volt Power Group

How Long Is Volt Power Group's 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. As at December 2020, Volt Power Group had cash of AU$666k and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was AU$521k over the trailing twelve months. So it had a cash runway of approximately 15 months from 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. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. You can see how its cash balance has changed over time in the image below.

How Is Volt Power Group's Cash Burn Changing Over Time?

Whilst it's great to see that Volt Power Group has already begun generating revenue from operations, last year it only produced AU$1.9m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 13% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Volt Power Group is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Volt Power Group To Raise More Cash For Growth?

While Volt Power Group is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. 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.

Volt Power Group's cash burn of AU$521k is about 1.6% of its AU$32m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Volt Power Group's Cash Burn A Worry?

The good news is that in our view Volt Power Group's cash burn situation gives shareholders real reason for optimism. Not only was its cash burn reduction quite good, but its cash burn relative to its market cap was a real 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Volt Power Group (of which 1 is concerning!) you should know about.

Of course Volt Power Group 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.

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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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