We're Keeping An Eye On Viking Supply Ships' (STO:VSSAB B) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

Given this risk, we thought we'd take a look at whether Viking Supply Ships (STO:VSSAB B) shareholders should 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' cash, relative to its cash burn.

Check out our latest analysis for Viking Supply Ships

Does Viking Supply Ships Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Viking Supply Ships last reported its balance sheet in December 2020, it had zero debt and cash worth kr104m. Importantly, its cash burn was kr63m over the trailing twelve months. So it had a cash runway of approximately 20 months from December 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

Is Viking Supply Ships' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Viking Supply Ships actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 43% during the period. In reality, this article only makes a short study of the company's growth data. You can take a look at how Viking Supply Ships has developed its business over time by checking this visualization of its revenue and earnings history.

Can Viking Supply Ships Raise More Cash Easily?

Given its problematic fall in revenue, Viking Supply Ships shareholders should consider how the company could fund its growth, if it turns out it needs more 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Viking Supply Ships' cash burn of kr63m is about 12% of its kr509m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Viking Supply Ships' Cash Burn A Worry?

On this analysis of Viking Supply Ships' cash burn, we think its cash burn relative to its market cap was reassuring, while its falling revenue has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Viking Supply Ships' situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Viking Supply Ships that investors should know when investing in the stock.

Of course Viking Supply Ships 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. 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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