Yahoo Finance We Think Borders & Southern Petroleum (LON:BOR) Needs To Drive Business Growth Carefully
There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Borders & Southern Petroleum (LON:BOR) has seen its share price rise 393% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So notwithstanding the buoyant share price, we think it's well worth asking whether Borders & Southern Petroleum's cash burn is too risky. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Borders & Southern Petroleum
How Long Is Borders & Southern Petroleum's 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 December 2021, Borders & Southern Petroleum had US$714k in cash, and was debt-free. Looking at the last year, the company burnt through US$1.4m. That means it had a cash runway of around 6 months as of December 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.
How Is Borders & Southern Petroleum's Cash Burn Changing Over Time?
Because Borders & Southern Petroleum 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. As it happens, the company's cash burn reduced by 3.9% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Admittedly, we're a bit cautious of Borders & Southern Petroleum 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 Easily Can Borders & Southern Petroleum Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Borders & Southern Petroleum to raise more cash in the future. 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. 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.
Borders & Southern Petroleum's cash burn of US$1.4m is about 4.0% of its US$36m market capitalisation. 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.
Is Borders & Southern Petroleum's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Borders & Southern Petroleum's cash burn relative to its market cap was relatively promising. Summing up, we think the Borders & Southern Petroleum's cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Borders & Southern Petroleum (of which 2 are concerning!) you should know about.
Of course Borders & Southern Petroleum 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.
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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.
