Yahoo Finance Here's Why We're Watching 8VIC Holdings's (ASX:8VI) Cash Burn Situation
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for 8VIC Holdings (ASX:8VI) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for 8VIC Holdings
When Might 8VIC Holdings 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 September 2019, 8VIC Holdings had S$6.3m in cash, and was debt-free. In the last year, its cash burn was S$1.8m. That means it had a cash runway of about 3.4 years as of September 2019. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Well Is 8VIC Holdings Growing?
Notably, 8VIC Holdings actually ramped up its cash burn very hard and fast in the last year, by 174%, signifying heavy investment in the business. As if that's not bad enough, the operating revenue also dropped by 3.2%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. You can take a look at how 8VIC Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For 8VIC Holdings To Raise More Cash For Growth?
8VIC Holdings seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to 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).
8VIC Holdings has a market capitalisation of S$11m and burnt through S$1.8m last year, which is 16% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is 8VIC Holdings's Cash Burn A Worry?
On this analysis of 8VIC Holdings's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 4 warning signs for 8VIC Holdings you should be aware of, and 3 of them are potentially serious.
Of course 8VIC Holdings 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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