Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Carnegie Clean Energy (ASX:CCE) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Carnegie Clean Energy Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Carnegie Clean Energy last reported its balance sheet in December 2021, it had zero debt and cash worth AU$4.7m. In the last year, its cash burn was AU$565k. So it had a cash runway of about 8.3 years from December 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Hard Would It Be For Carnegie Clean Energy To Raise More Cash For Growth?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Carnegie Clean Energy has a market capitalisation of AU$38m and burnt through AU$565k last year, which is 1.5% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
So, Should We Worry About Carnegie Clean Energy's Cash Burn?
Because Carnegie Clean Energy is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Having said that, we can say that its cash runway was a real positive. Overall, we think its cash burn seems perfectly reasonable, and we are not concerned by it. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Carnegie Clean Energy (of which 2 are concerning!) you should know about.
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.
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