There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 should Invictus Energy (ASX:IVZ) shareholders be worried about its cash burn? For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let’s start with an examination of the business’s cash, relative to its cash burn.
How Long Is Invictus 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. When Invictus Energy last reported its balance sheet in December 2018, it had zero debt and cash worth AU$3.1m. Importantly, its cash burn was AU$1.1m over the trailing twelve months. That means it had a cash runway of about 2.8 years as of December 2018. That’s decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Is Invictus Energy’s Cash Burn Changing Over Time?
Because Invictus Energy isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The skyrocketing cash burn up 116% year on year certainly tests our nerves. That sort of spending growth rate can’t continue for very long before it causes balance sheet weakness, generally speaking. Invictus Energy makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Invictus Energy Raise More Cash Easily?
Given its cash burn trajectory, Invictus Energy shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Invictus Energy has a market capitalisation of AU$15m and burnt through AU$1.1m last year, which is 7.4% of the company’s market value. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Invictus Energy’s Cash Burn A Worry?
It may already be apparent to you that we’re relatively comfortable with the way Invictus Energy is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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. Notably, our data indicates that Invictus Energy insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.Of course Invictus 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.
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