We're Keeping An Eye On Buru Energy's (ASX:BRU) Cash Burn Rate

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Buru Energy (ASX:BRU) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Buru Energy

How Long Is Buru 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. As at December 2021, Buru Energy had cash of AU$24m and no debt. Looking at the last year, the company burnt through AU$12m. That means it had a cash runway of about 2.0 years as of December 2021. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Well Is Buru Energy Growing?

At first glance it's a bit worrying to see that Buru Energy actually boosted its cash burn by 48%, year on year. Also concerning, operating revenue was actually down by 15% in that time. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Buru Energy is building its business over time.

How Easily Can Buru Energy Raise Cash?

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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Buru Energy has a market capitalisation of AU$72m and burnt through AU$12m last year, which is 16% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Buru Energy's Cash Burn?

On this analysis of Buru Energy's cash burn, we think its cash runway 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, Buru Energy has 3 warning signs (and 1 which shouldn't be ignored) 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.