We're Hopeful That Vivoryon Therapeutics (AMS:VVY) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Vivoryon Therapeutics (AMS:VVY) has seen its share price rise 106% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Vivoryon Therapeutics' cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Vivoryon Therapeutics

Does Vivoryon Therapeutics Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Vivoryon Therapeutics last reported its balance sheet in June 2020, it had zero debt and cash worth €34m. Looking at the last year, the company burnt through €15m. That means it had a cash runway of about 2.3 years as of June 2020. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Is Vivoryon Therapeutics' Cash Burn Changing Over Time?

Because Vivoryon Therapeutics isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 136%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Vivoryon Therapeutics To Raise More Cash For Growth?

While Vivoryon Therapeutics 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Vivoryon Therapeutics has a market capitalisation of €319m and burnt through €15m last year, which is 4.7% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Vivoryon Therapeutics' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Vivoryon Therapeutics' 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. On another note, Vivoryon Therapeutics has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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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