Companies Like Vsolar Group Berhad (KLSE:VSOLAR) Are In A Position To Invest In Growth

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. 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. 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.

So, the natural question for Vsolar Group Berhad (KLSE:VSOLAR) shareholders is whether they should be concerned by its rate of cash burn. 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Vsolar Group Berhad

How Long Is Vsolar Group Berhad's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Vsolar Group Berhad has such a small amount of debt that we'll set it aside, and focus on the RM52m in cash it held at June 2021. Looking at the last year, the company burnt through RM6.5m. That means it had a cash runway of about 7.9 years as of June 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Is Vsolar Group Berhad's Cash Burn Changing Over Time?

Whilst it's great to see that Vsolar Group Berhad has already begun generating revenue from operations, last year it only produced RM7.7m, so we don't think it is generating significant revenue, at this point. 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 145%. With spending growing that quickly, shareholders will be hoping that the money is prudently spent. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Vsolar Group Berhad is building its business over time.

How Easily Can Vsolar Group Berhad Raise Cash?

While Vsolar Group Berhad 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. 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.

Vsolar Group Berhad has a market capitalisation of RM91m and burnt through RM6.5m last year, which is 7.1% of the company's 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.

How Risky Is Vsolar Group Berhad's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Vsolar Group Berhad is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Vsolar Group Berhad (2 are a bit unpleasant!) that you should be aware of before investing here.

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. 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.