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We're Keeping An Eye On Vectus Biosystems' (ASX:VBS) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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. 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 should Vectus Biosystems (ASX:VBS) shareholders be worried about its 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.

View our latest analysis for Vectus Biosystems

When Might Vectus Biosystems Run Out Of Money?

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 Vectus Biosystems last reported its balance sheet in December 2022, it had zero debt and cash worth AU$3.6m. In the last year, its cash burn was AU$4.1m. That means it had a cash runway of around 10 months as of 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.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Vectus Biosystems' Cash Burn Changing Over Time?

In our view, Vectus Biosystems doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.9m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Vectus Biosystems is building its business over time.

Can Vectus Biosystems Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Vectus Biosystems to raise more cash in the future. Companies can raise capital through either debt or equity. 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.

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Vectus Biosystems has a market capitalisation of AU$38m and burnt through AU$4.1m last year, which is 11% 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.

Is Vectus Biosystems' Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Vectus Biosystems' 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, we conducted an in-depth investigation of the company, and identified 5 warning signs for Vectus Biosystems (3 can't be ignored!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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