Yahoo Finance We're Not Very Worried About Enegex's (ASX:ENX) Cash Burn Rate
We can readily understand why investors are attracted to unprofitable companies. Indeed, Enegex (ASX:ENX) stock is up 1,257% in the last year, providing strong gains for shareholders. 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.
In light of its strong share price run, we think now is a good time to investigate how risky Enegex's cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Enegex
How Long Is Enegex'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. When Enegex last reported its balance sheet in December 2020, it had zero debt and cash worth AU$1.1m. In the last year, its cash burn was AU$449k. So it had a cash runway of about 2.4 years from December 2020. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Is Enegex's Cash Burn Changing Over Time?
Because Enegex isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Remarkably, it actually increased its cash burn by 205% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Admittedly, we're a bit cautious of Enegex due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Enegex Raise More Cash Easily?
While Enegex does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and 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 AU$27m, Enegex's AU$449k in cash burn equates to about 1.6% of its 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.
How Risky Is Enegex's Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Enegex's cash burn relative to its market cap was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Enegex (of which 2 are a bit concerning!) you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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. 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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