We're Keeping An Eye On Vow Green Metals' (OB:VGM) Cash Burn Rate

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. 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 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View 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. When Vow Green Metals last reported its balance sheet in December 2021, it had zero debt and cash worth kr68m. Importantly, its cash burn was kr90m over the trailing twelve months. So it had a cash runway of approximately 9 months from December 2021. 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.

How Hard Would It Be For Vow Green Metals To Raise More Cash For Growth?

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

Vow Green Metals' cash burn of kr90m is about 23% of its kr387m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Vow Green Metals' Cash Burn?

Because Vow Green Metals 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. But generally speaking, we can say that early stage companies like Vow Green Metals are generally higher risk than well established businesses. From what we can see the company is not in a strong position and there is a clear risk that the cash burn will cause problems for it. On another note, Vow Green Metals has 4 warning signs (and 1 which is significant) we think you should know about.

Of course Vow Green Metals 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. 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.