Here’s Why We’re A Bit Worried About Vanadium Resources’s (ASX:VR8) Cash Burn Situation
There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Vanadium Resources (ASX:VR8) shareholders is whether they should be concerned by its rate of 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.
How Long Is Vanadium Resources’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. When Vanadium Resources last reported its balance sheet in June 2019, it had zero debt and cash worth AU$931k. In the last year, its cash burn was AU$4.3m. That means it had a cash runway of around 3 months as of June 2019. That’s a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. You can see how its cash balance has changed over time in the image below.
How Is Vanadium Resources’s Cash Burn Changing Over Time?
While Vanadium Resources did record statutory revenue of AU$2.9k over the last year, it didn’t have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. The skyrocketing cash burn up 107% year on year certainly tests our nerves. That sort of spending growth rate can’t continue for very long before it causes balance sheet weakness, generally speaking. Admittedly, we’re a bit cautious of Vanadium Resources due to its lack of significant operating revenues.
Can Vanadium Resources Raise More Cash Easily?
Given its cash burn trajectory, Vanadium Resources shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of AU$15m, Vanadium Resources’s AU$4.3m in cash burn equates to about 29% 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.
Is Vanadium Resources’s Cash Burn A Worry?
There are no prizes for guessing that we think Vanadium Resources’s cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its cash burn relative to its market cap is also a concern, and considering everything mentioned above, we’re struggling to find much to be optimistic about. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Notably, our data indicates that Vanadium Resources insiders have been trading the shares.
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