Will vTv Therapeutics (NASDAQ:VTVT) Spend Its Cash Wisely?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, vTv Therapeutics (NASDAQ:VTVT) shareholders have done very well over the last year, with the share price soaring by 120%. 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 notwithstanding the buoyant share price, we think it's well worth asking whether vTv Therapeutics' cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for vTv Therapeutics

How Long Is vTv Therapeutics' Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. vTv Therapeutics has such a small amount of debt that we'll set it aside, and focus on the US$12m in cash it held at December 2022. Importantly, its cash burn was US$16m over the trailing twelve months. So it had a cash runway of approximately 9 months from December 2022. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is vTv Therapeutics Growing?

On balance, we think it's mildly positive that vTv Therapeutics trimmed its cash burn by 17% over the last twelve months. Unfortunately, however, operating revenue declined by 50% during the period. Taken together, we think these growth metrics are a little worrying. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can vTv Therapeutics Raise Cash?

Given vTv Therapeutics' revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

vTv Therapeutics has a market capitalisation of US$96m and burnt through US$16m last year, which is 17% of the company's market value. 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.

How Risky Is vTv Therapeutics' Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought vTv Therapeutics' cash burn reduction was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Taking a deeper dive, we've spotted 6 warning signs for vTv Therapeutics you should be aware of, and 2 of them are significant.

Of course vTv Therapeutics 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.