Here’s Why We’re Not Too Worried About Petratherm’s (ASX:PTR) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Petratherm (ASX:PTR) shareholders be worried about its cash burn? 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’s cash, relative to its cash burn.

Check out our latest analysis for Petratherm

How Long Is Petratherm’s Cash Runway?

A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, Petratherm had AU$3.9m in cash, and was debt-free. Looking at the last year, the company burnt through AU$741k. That means it had a cash runway of about 5.2 years as of June 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

ASX:PTR Historical Debt, February 27th 2020
ASX:PTR Historical Debt, February 27th 2020

How Is Petratherm’s Cash Burn Changing Over Time?

Whilst it’s great to see that Petratherm has already begun generating revenue from operations, last year it only produced AU$17k, so we don’t think it is generating significant revenue, at this point. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. During the last twelve months, its cash burn actually ramped up 71%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Petratherm 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.

How Easily Can Petratherm Raise Cash?

Given its cash burn trajectory, Petratherm shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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).

Petratherm’s cash burn of AU$741k is about 7.2% of its AU$10m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.

Is Petratherm’s Cash Burn A Worry?

It may already be apparent to you that we’re relatively comfortable with the way Petratherm is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn, which seems to be under control. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Petratherm insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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