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. 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 Vuzix (NASDAQ:VUZI) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Vuzix's 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. In June 2022, Vuzix had US$101m in cash, and was debt-free. In the last year, its cash burn was US$37m. Therefore, from June 2022 it had 2.7 years of cash runway. That's decent, giving the company a couple years to develop its business. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. The image below shows how its cash balance has been changing over the last few years.
How Well Is Vuzix Growing?
Vuzix actually ramped up its cash burn by a whopping 82% in the last year, which shows it is boosting investment in the business. As if that's not bad enough, the operating revenue also dropped by 14%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Vuzix Raise More Cash Easily?
Even though it seems like Vuzix is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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).
Since it has a market capitalisation of US$370m, Vuzix's US$37m in cash burn equates to about 10.0% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Vuzix's Cash Burn Situation?
On this analysis of Vuzix's cash burn, we think its cash runway was reassuring, while its increasing cash burn 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 Vuzix's situation. Taking an in-depth view of risks, we've identified 2 warning signs for Vuzix that you should be aware of before investing.
Of course Vuzix 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.
What are the risks and opportunities for Vuzix?
Revenue is forecast to grow 38.27% per year
Earnings are forecast to decline by an average of 0.1% per year for the next 3 years
Currently unprofitable and not forecast to become profitable over the next 3 years
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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.
Vuzix Corporation, together with its subsidiaries, designs, manufactures, markets, and sells augmented reality (AR) wearable display and computing devices for consumer and enterprise markets in North America, the Asia-Pacific, Europe, and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with limited growth.