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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Verde Clean Fuels (NASDAQ:VGAS) shareholders is whether they should be concerned by its rate of 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.
See our latest analysis for Verde Clean Fuels
How Long Is Verde Clean Fuels’ 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. In March 2024, Verde Clean Fuels had US$26m in cash, and was debt-free. Importantly, its cash burn was US$9.2m over the trailing twelve months. So it had a cash runway of about 2.8 years from March 2024. Arguably, that’s a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is Verde Clean Fuels’ Cash Burn Changing Over Time?
Because Verde Clean Fuels isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. During the last twelve months, its cash burn actually ramped up 71%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Admittedly, we’re a bit cautious of Verde Clean Fuels due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Verde Clean Fuels To Raise More Cash For Growth?
While Verde Clean Fuels does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Verde Clean Fuels has a market capitalisation of US$136m and burnt through US$9.2m 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.
So, Should We Worry About Verde Clean Fuels’ Cash Burn?
As you can probably tell by now, we’re not too worried about Verde Clean Fuels’ cash burn. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking a deeper dive, we’ve spotted 2 warning signs for Verde Clean Fuels you should be aware of, and 1 of them can’t be ignored.
Of course Verde Clean Fuels 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
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