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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Stonehorse Energy (ASX:SHE) shareholders is whether they should be concerned by its rate of cash burn. 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. Let's start with an examination of the business's cash, relative to its cash burn.
How Long Is Stonehorse Energy's Cash Runway?
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. Stonehorse Energy has such a small amount of debt that we'll set it aside, and focus on the AU$2.1m in cash it held at December 2019. In the last year, its cash burn was AU$2.5m. That means it had a cash runway of around 10 months as of December 2019. 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. You can see how its cash balance has changed over time in the image below.
How Is Stonehorse Energy's Cash Burn Changing Over Time?
In our view, Stonehorse Energy doesn't yet produce significant amounts of operating revenue, since it reported just AU$283k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Remarkably, it actually increased its cash burn by 580% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Stonehorse Energy makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Stonehorse Energy To Raise More Cash For Growth?
Since its cash burn is moving in the wrong direction, Stonehorse Energy shareholders may wish to think ahead to when the company may need to raise more cash. 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 to 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.
Stonehorse Energy's cash burn of AU$2.5m is about 106% of its AU$2.4m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is Stonehorse Energy's Cash Burn A Worry?
There are no prizes for guessing that we think Stonehorse Energy's cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. While not as bad as its cash burn relative to its market cap, its cash runway is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. Separately, we looked at different risks affecting the company and spotted 7 warning signs for Stonehorse Energy (of which 6 make us uncomfortable!) you should know about.
Of course Stonehorse Energy 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.