Just because a business does not make any money, does not mean that the stock will go down. 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 should Viatron (WSE:VIA) shareholders be worried about its 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's cash, relative to its cash burn.
How Long Is Viatron's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2019, Viatron had cash of zł36k and no debt. In the last year, its cash burn was zł114k. That means it had a cash runway of around 4 months as of December 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.
How Hard Would It Be For Viatron To Raise More Cash For Growth?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to 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).
Viatron has a market capitalisation of zł5.7m and burnt through zł114k last year, which is 2.0% 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.
Is Viatron's Cash Burn A Worry?
Because Viatron is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. However, it is fair to say that its cash burn relative to its market cap gave us comfort. 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. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Viatron CEO is paid..
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