There is no doubt that money can be made by owning shares of unprofitable companies. Indeed, Energy Bannerman (ASX: BMN) the stock has risen 583% in the past year, delivering solid gains to shareholders. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
In light of the sharp rise in its stock price, we believe the time has come to consider how risky Bannerman Energy’s cash consumption is. In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash flow track.
Check out our latest review for Bannerman Energy
When could Bannerman Energy run out of money?
You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. When Bannerman Energy last published its balance sheet in June 2021, it had no debt and cash worth AU $ 12 million. Importantly, his cash consumption was AU $ 2.9 million in the past twelve months. So he had a cash trail of around 4.3 years as of June 2021. There is no doubt that this is a reassuringly long trail. The image below shows how her cash balance has evolved over the past few years.
How does Bannerman Energy’s silver consumption change over time?
Since Bannerman Energy does not currently generate any revenue, we consider it to be a start-up company. Nonetheless, we can still examine its cash consumption trajectory as part of our assessment of its cash consumption situation. Over the past year, its cash consumption has actually increased by 38%, which suggests that management is increasing its investments in future growth, but not too quickly. This is not necessarily a bad thing, but investors should be aware that it will shorten the liquidity trail. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at how the business is expected to grow over the next few years.
How easily can Bannerman Energy raise funds?
Given its cash-consuming trajectory, Bannerman Energy shareholders may want to consider how easily it could raise more cash, despite its strong liquidity trail. The issuance of new shares or indebtedness are the most common ways for a listed company to raise more money for its activity. Usually, a company will sell new stocks on its own to raise funds and stimulate growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Since it has a market cap of AU $ 345 million, Bannerman Energy’s consumption of AU $ 2.9 million of cash is equivalent to approximately 0.8% of its market value. This means that he could easily issue a few stocks to fund more growth and may well be able to borrow at a lower cost.
Is Bannerman Energy’s Cash Burn a Problem?
As you can probably see by now, we’re not too worried about Bannerman Energy’s cash consumption. For example, we think his cash flow trail suggests the business is on the right track. While its increasing consumption of cash gives us a reason to stop, the other measures we have discussed in this article form an overall positive picture. After taking into account the various measures mentioned in this report, we are quite comfortable with the way the company is spending its money, as it seems to be on track to meet its needs in the medium term. On another note, we conducted a thorough investigation of the company and identified 6 warning signs for Bannerman Energy (2 are a bit nasty!) Which you should be aware of before investing here.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analysts’ forecasts)
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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