We can readily understand why investors are attracted to unprofitable companies. Indeed, Bounty Oil & Gas (ASX:BUY) stock is up 150% in the last year, providing strong gains for shareholders. 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.
Given its strong share price performance, we think it's worthwhile for Bounty Oil & Gas shareholders to consider whether its cash burn is concerning. 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.
How Long Is Bounty Oil & Gas' Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Bounty Oil & Gas last reported its balance sheet in December 2020, it had zero debt and cash worth AU$1.6m. Importantly, its cash burn was AU$1.3m over the trailing twelve months. Therefore, from December 2020 it had roughly 14 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.
Is Bounty Oil & Gas' Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Bounty Oil & Gas actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. The grim reality for shareholders is that operating revenue fell by 61% over the last twelve months, which is not what we want to see in a cash burning company. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Bounty Oil & Gas is building its business over time.
How Easily Can Bounty Oil & Gas Raise Cash?
Given its problematic fall in revenue, Bounty Oil & Gas shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).
Bounty Oil & Gas' cash burn of AU$1.3m is about 4.3% of its AU$31m market capitalisation. 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 Bounty Oil & Gas' Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Bounty Oil & Gas' cash burn relative to its market cap was relatively promising. 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. Taking an in-depth view of risks, we've identified 4 warning signs for Bounty Oil & Gas that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
When trading Bounty Oil & Gas or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
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. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.