Is Vow Green Metals (OB:VGM) In A Good Position To Deliver On Growth Plans?

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Vow Green Metals (OB:VGM) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Vow Green Metals

How Long Is Vow Green Metals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2021, Vow Green Metals had cash of kr68m and no debt. Looking at the last year, the company burnt through kr90m. So it had a cash runway of approximately 9 months from December 2021. Notably, one analyst forecasts that Vow Green Metals will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Easily Can Vow Green Metals Raise Cash?

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).

Vow Green Metals' cash burn of kr90m is about 18% of its kr503m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Vow Green Metals' Cash Burn Situation?

Given it's an early stage company, we don't have a lot of data with which to judge Vow Green Metals' cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. But generally speaking, we can say that early stage companies like Vow Green Metals are generally higher risk than well established businesses. For us, the key takeaway here is that its cash burn is worth monitoring closely because it may have to raise more capital in due course. On another note, Vow Green Metals has 5 warning signs (and 1 which is a bit unpleasant) 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. 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.