Here's Why We're Not Too Worried About VirnetX Holding's (NYSE:VHC) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. 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 VirnetX Holding (NYSE:VHC) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for VirnetX Holding

When Might VirnetX Holding Run Out Of Money?

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. In December 2022, VirnetX Holding had US$152m in cash, and was debt-free. Looking at the last year, the company burnt through US$17m. That means it had a cash runway of about 9.0 years as of December 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

How Is VirnetX Holding's Cash Burn Changing Over Time?

In our view, VirnetX Holding doesn't yet produce significant amounts of operating revenue, since it reported just US$48k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The 67% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Admittedly, we're a bit cautious of VirnetX Holding due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For VirnetX Holding To Raise More Cash For Growth?

There's no doubt VirnetX Holding's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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$45m, VirnetX Holding's US$17m in cash burn equates to about 38% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is VirnetX Holding's Cash Burn Situation?

As you can probably tell by now, we're not too worried about VirnetX Holding's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 4 warning signs for VirnetX Holding (of which 2 are concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.