Yahoo Finance Here's Why We're Not Too Worried About Velocity Composites's (LON:VEL) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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.
Given this risk, we thought we'd take a look at whether Velocity Composites (LON:VEL) shareholders should be worried about its 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.
View our latest analysis for Velocity Composites
How Long Is Velocity Composites'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. Velocity Composites has such a small amount of debt that we'll set it aside, and focus on the UK£3.4m in cash it held at October 2019. Importantly, its cash burn was UK£505k over the trailing twelve months. So it had a cash runway of about 6.8 years from October 2019. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.
Is Velocity Composites's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Velocity Composites actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. As it happens, operating revenue has been pretty flat over the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Velocity Composites is building its business over time.
How Easily Can Velocity Composites Raise Cash?
Given its problematic fall in revenue, Velocity Composites shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Velocity Composites has a market capitalisation of UK£7.6m and burnt through UK£505k last year, which is 6.7% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Velocity Composites's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Velocity Composites is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking a deeper dive, we've spotted 4 warning signs for Velocity Composites you should be aware of, and 2 of them are significant.
Of course Velocity Composites 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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