Bannerman Resources Limited (ASX:BMN) continues its loss-making streak, announcing negative earnings for its latest financial year ending. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Bannerman Resources is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Bannerman Resources’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
Bannerman Resources currently has AU$7.4m in the bank, with negative free cash flow of -AU$2.3m. The biggest threat facing Bannerman Resources investors is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the highly risky energy industry often face this problem, and Bannerman Resources is no exception. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Bannerman Resources need to raise more cash?
One way to measure the cost to Bannerman Resources of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Over the last twelve months, free cash outflows increased by 14%, which is fairly normal for a small-cap. According to my analysis, if Bannerman Resources continues to grow at this rate, it will burn through its cash reserves by the next 2.9 years, and may be raising capital again. Not the best news for shareholders. But if the company does not increase its cash burn next year and remains at the current level of -AU$2.3m, then it should not need to raise further capital for the next few years. Even though this is analysis is fairly basic, and Bannerman Resources still can cut its overhead in the near future, or borrow money instead of raising new equity capital, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
The risks involved in investing in loss-making Bannerman Resources means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its high cash burn growth and its level of cash reserves. An opportunity may exist for you to enter into the stock at a lower price, should Bannerman Resources have to raise money to continue operating. I admit this is a fairly basic analysis for BMN's financial health. Other important fundamentals need to be considered as well. I suggest you continue to research Bannerman Resources to get a more holistic view of the company by looking at:
- Historical Performance: What has BMN's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Bannerman Resources’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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