Yahoo Finance We Think Vulcan Energy Resources (ASX:VUL) Needs To Drive Business Growth Carefully
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Vulcan Energy Resources (ASX:VUL) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Vulcan Energy Resources
When Might Vulcan Energy Resources 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 2023, Vulcan Energy Resources had €79m in cash, and was debt-free. Looking at the last year, the company burnt through €117m. That means it had a cash runway of around 8 months as of December 2023. Notably, analysts forecast that Vulcan Energy Resources will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Vulcan Energy Resources Growing?
Notably, Vulcan Energy Resources actually ramped up its cash burn very hard and fast in the last year, by 101%, signifying heavy investment in the business. Of course, the truly verdant revenue growth of 112% in that time may well justify the growth spend. On balance, we'd say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Vulcan Energy Resources Raise More Cash Easily?
Since Vulcan Energy Resources has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Since it has a market capitalisation of €582m, Vulcan Energy Resources' €117m in cash burn equates to about 20% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
So, Should We Worry About Vulcan Energy Resources' Cash Burn?
On this analysis of Vulcan Energy Resources' cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, Vulcan Energy Resources has 4 warning signs (and 1 which can't be ignored) we think you should know about.
Of course Vulcan Energy Resources 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 with high insider ownership.
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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.
