Will VirnetX Holding (NYSE:VHC) Spend Its Cash Wisely?

Simply Wall St · 10/18 11:06

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 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should VirnetX Holding (NYSE:VHC) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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 VirnetX Holding

When Might VirnetX Holding Run Out Of Money?

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. When VirnetX Holding last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth US$47m. Looking at the last year, the company burnt through US$17m. That means it had a cash runway of about 2.8 years as of June 2024. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
NYSE:VHC Debt to Equity History October 18th 2024

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$6.0k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 29% over the last year suggests some degree of prudence. VirnetX Holding makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For VirnetX Holding To Raise More Cash For Growth?

While VirnetX Holding is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Since it has a market capitalisation of US$25m, VirnetX Holding's US$17m in cash burn equates to about 69% of its market value. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

How Risky Is VirnetX Holding's Cash Burn Situation?

On this analysis of VirnetX Holding's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for VirnetX Holding (2 are concerning!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)