Yahoo Finance Will Australian Vanadium (ASX:AVL) Spend Its Cash Wisely?
There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Australian Vanadium (ASX:AVL) has seen its share price rise 109% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So notwithstanding the buoyant share price, we think it's well worth asking whether Australian Vanadium's cash burn is too risky. 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. Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Australian Vanadium
How Long Is Australian Vanadium's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2020, Australian Vanadium had cash of AU$5.5m and no debt. In the last year, its cash burn was AU$7.4m. Therefore, from June 2020 it had roughly 9 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Is Australian Vanadium's Cash Burn Changing Over Time?
While Australian Vanadium did record statutory revenue of AU$132k 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. As it happens, the company's cash burn reduced by 5.2% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Australian Vanadium makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Australian Vanadium Raise More Cash Easily?
While Australian Vanadium is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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.
Australian Vanadium's cash burn of AU$7.4m is about 11% of its AU$67m 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 Australian Vanadium's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Australian Vanadium's cash burn relative to its market cap was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, Australian Vanadium has 6 warning signs (and 3 which are a bit unpleasant) we think you should know about.
Of course Australian Vanadium 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.
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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