We Think Phoslock Environmental Technologies (ASX:PET) Needs To Drive Business Growth Carefully

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Phoslock Environmental Technologies (ASX:PET) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Phoslock Environmental Technologies

How Long Is Phoslock Environmental Technologies' 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 Phoslock Environmental Technologies last reported its balance sheet in June 2022, it had zero debt and cash worth AU$18m. In the last year, its cash burn was AU$7.9m. Therefore, from June 2022 it had 2.2 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Well Is Phoslock Environmental Technologies Growing?

Over the last year, Phoslock Environmental Technologies maintained its cash burn at a fairly steady level. Similarly, operating revenue remained fairly constant, which is hardly inspiring. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Phoslock Environmental Technologies is building its business over time.

How Easily Can Phoslock Environmental Technologies Raise Cash?

While Phoslock Environmental Technologies seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Phoslock Environmental Technologies has a market capitalisation of AU$38m and burnt through AU$7.9m last year, which is 21% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Phoslock Environmental Technologies' Cash Burn?

On this analysis of Phoslock Environmental Technologies' cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Phoslock Environmental Technologies' situation. On another note, Phoslock Environmental Technologies has 4 warning signs (and 2 which are significant) we think you should know about.

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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.