We can readily understand why investors are attracted to unprofitable companies. 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 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 should Peninsula Energy (ASX:PEN) shareholders be worried about its cash burn? In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Peninsula Energy
When Might Peninsula Energy Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Peninsula Energy last reported its June 2024 balance sheet in September 2024, it had zero debt and cash worth US$100m. In the last year, its cash burn was US$28m. That means it had a cash runway of about 3.5 years as of June 2024. Importantly, though, analysts think that Peninsula Energy will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Peninsula Energy Growing?
It was quite stunning to see that Peninsula Energy increased its cash burn by 285% over the last year. And that is all the more of a concern in light of the fact that operating revenue was actually down by 71% in the last year, as the company no doubt scrambles to change its fortunes. In light of the above-mentioned, we’re pretty wary of the trajectory the company seems to be on. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Peninsula Energy Raise Cash?
While Peninsula Energy seems to be in a fairly good position, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. 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.
Since it has a market capitalisation of US$210m, Peninsula Energy’s US$28m 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.
Is Peninsula Energy’s Cash Burn A Worry?
On this analysis of Peninsula Energy’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. There’s no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. An in-depth examination of risks revealed 1 warning sign for Peninsula Energy that readers should think about before committing capital to this stock.
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)
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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.
