Stock Analysis

We Think Largo Physical Vanadium (CVE:VAND) Needs To Drive Business Growth Carefully

TSXV:VAND
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We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Largo Physical Vanadium (CVE:VAND) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Largo Physical Vanadium

How Long Is Largo Physical Vanadium'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 July 2022, Largo Physical Vanadium had cash of CA$396k and no debt. Looking at the last year, the company burnt through CA$487k. That means it had a cash runway of around 10 months as of July 2022. 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. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
TSXV:VAND Debt to Equity History February 1st 2023

Can Largo Physical Vanadium Raise More Cash Easily?

Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Largo Physical Vanadium has a market capitalisation of CA$30m and burnt through CA$487k last year, which is 1.6% of the company's market value. 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.

So, Should We Worry About Largo Physical Vanadium's Cash Burn?

Because Largo Physical Vanadium is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash burn relative to its market cap gave us comfort. While cash burning companies are always comparatively risky, we think its cash burn situation seems ok, on balance. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Largo Physical Vanadium (of which 3 shouldn't be ignored!) you should know about.

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)

Valuation is complex, but we're helping make it simple.

Find out whether Largo Physical Vanadium is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.