Is Buru Energy (ASX:BRU) In A Good Position To Deliver On Growth Plans?

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. 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.

So, the natural question for Buru Energy (ASX:BRU) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Buru Energy

SWOT Analysis for Buru Energy

How Long Is Buru Energy's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Buru Energy last reported its balance sheet in December 2022, it had zero debt and cash worth AU$18m. In the last year, its cash burn was AU$14m. So it had a cash runway of approximately 16 months from December 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

How Well Is Buru Energy Growing?

Some investors might find it troubling that Buru Energy is actually increasing its cash burn, which is up 17% in the last year. The good news is that operating revenue increased by 45% in the last year, indicating that the business is gaining some traction. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Buru Energy is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Buru Energy To Raise More Cash For Growth?

Buru Energy seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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 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.

Buru Energy has a market capitalisation of AU$69m and burnt through AU$14m last year, which is 20% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Buru Energy's Cash Burn A Worry?

On this analysis of Buru Energy's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Buru Energy (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course Buru 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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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.