There is no doubt that money can be made by owning shares of unprofitable companies. For exemple, Vimy Resources (ASX: VMY) has seen its share price rise 755% over the past year, delighting many shareholders. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
So despite the strong share price, we believe it is worth considering whether Vimy Resources’ cash consumption is too risky. In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
See our latest review for Vimy Resources
How long is the Vimy Resources treasury track?
You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. As of June 2021, Vimy Resources had AUS $ 24 million in cash and no debt. In the past year, its cash consumption was A $ 9.2 million. So he had a cash trail of around 2.6 years from June 2021. It’s arguably a cautious and reasonable length of trail to have. The image below shows how her cash balance has evolved over the past few years.
How does Vimy Resources’ silver consumption change over time?
Vimy Resources has not recorded any revenue over the past year, indicating that it is a start-up company that continues to expand its business. So while we can’t look at sales to understand growth, we can look at changes in cash consumption to understand changes in expenses over time. Over the past twelve months, its cash consumption has actually increased by 76%. Often times, increased cash consumption just means that a business is speeding up its business development, but it should always be kept in mind that this leads to a reduction in the cash flow trail. If the past is always worth studying, it is the future that matters most. For this reason, it makes a lot of sense to take a look at our analyst forecast for the company.
Can Vimy Resources Easily Raise More Money?
Given its cash-consuming trajectory, Vimy Resources shareholders may wish to consider how easily it could raise more cash, despite its strong liquidity track. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Many companies end up issuing new shares to fund their future growth. By looking at a company’s cash consumption relative to its market capitalization, we get an idea of how many shareholders would be diluted if the company needed to raise enough cash to cover another’s cash consumption. year.
Vimy Resources has a market capitalization of A $ 277 million and spent A $ 9.2 million last year, or 3.3% of the company’s market value. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.
How risky is Vimy Resources’ cash flow situation?
It may already be obvious to you that we are relatively comfortable with how Vimy Resources spend their money. In particular, we believe that its consumption of cash in relation to its market capitalization is proof that the company has good control over its spending. Although its growing consumption of cash has not been significant, the other factors mentioned in this article more than make up for the weakness of this measure. Looking at all of the metrics in this article, together, we’re not worried about its rate of cash consumption; the business appears to be well above its medium-term spending needs. On another note, we conducted a thorough investigation of the company and identified 5 Warning Signs for Vimy Resources (2 are potentially serious!) Which you should know before investing here.
If you prefer to consult another company with better fundamentals, don’t miss this free list of interesting companies that have HIGH ROE and low debt or this list of stocks that are all expected to grow.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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