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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 VirnetX Holding (NYSE:VHC) shareholders 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. Let's start with an examination of the business' cash, relative to its cash burn.
How Long Is VirnetX Holding's Cash Runway?
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 March 2022, VirnetX Holding had US$165m in cash, and was debt-free. Importantly, its cash burn was US$51m over the trailing twelve months. So it had a cash runway of about 3.2 years from March 2022. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Is VirnetX Holding's Cash Burn Changing Over Time?
In our view, VirnetX Holding doesn't yet produce significant amounts of operating revenue, since it reported just US$35k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Even though it doesn't get us excited, the 47% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of VirnetX Holding due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can VirnetX Holding Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for VirnetX Holding 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 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).
VirnetX Holding has a market capitalisation of US$145m and burnt through US$51m last year, which is 36% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About VirnetX Holding's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way VirnetX Holding 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. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, VirnetX Holding has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
