Here's Why We're Not At All Concerned With VerifyMe's (NASDAQ:VRME) 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether VerifyMe (NASDAQ:VRME) shareholders should 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.

View our latest analysis for VerifyMe

When Might VerifyMe 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 VerifyMe last reported its balance sheet in June 2021, it had zero debt and cash worth US$11m. In the last year, its cash burn was US$3.1m. Therefore, from June 2021 it had 3.7 years of cash runway. Notably, however, the one analyst we see covering the stock thinks that VerifyMe will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

How Is VerifyMe's Cash Burn Changing Over Time?

In our view, VerifyMe doesn't yet produce significant amounts of operating revenue, since it reported just US$488k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. During the last twelve months, its cash burn actually ramped up 99%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can VerifyMe Raise More Cash Easily?

Given its cash burn trajectory, VerifyMe shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Since it has a market capitalisation of US$23m, VerifyMe's US$3.1m in cash burn equates to about 13% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About VerifyMe's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way VerifyMe is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking a deeper dive, we've spotted 5 warning signs for VerifyMe you should be aware of, and 1 of them is a bit concerning.

Of course VerifyMe 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.

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.

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