Just because a business does not make any money, does not mean that the stock will go down. 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 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, the natural question for PetroTal (CVE:TAL) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might PetroTal Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2019, PetroTal had cash of US$33m and no debt. Importantly, its cash burn was US$35m over the trailing twelve months. That means it had a cash runway of around 11 months as of June 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Is PetroTal's Cash Burn Changing Over Time?
In the last year, PetroTal did book revenue of US$22m, but its revenue from operations was less, at just US$22m. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. Over the last year its cash burn actually increased by a very significant 89%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can PetroTal Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, PetroTal shareholders may wish to think 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 to drive 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 CA$168m, PetroTal's US$35m in cash burn equates to about 27% of its 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 PetroTal's Cash Burn?
PetroTal is not in a great position when it comes to its cash burn situation. While its cash runway wasn't too bad, its increasing cash burn does leave us rather nervous. Summing up, we think the PetroTal's cash burn is a risk, based on the factors we mentioned in this article. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the PetroTal CEO receives in total remuneration.
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