Will Global Energy Ventures (ASX:GEV) Spend Its Cash Wisely?

Just because a business does not make any money, does not mean that the stock will go down. 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 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 should Global Energy Ventures (ASX:GEV) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Global Energy Ventures

How Long Is Global Energy Ventures' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Global Energy Ventures had AU$2.1m in cash, and was debt-free. Looking at the last year, the company burnt through AU$2.5m. That means it had a cash runway of around 10 months as of December 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

How Is Global Energy Ventures' Cash Burn Changing Over Time?

Because Global Energy Ventures isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. As it happens, the company's cash burn reduced by 47% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we're a bit cautious of Global Energy Ventures due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Global Energy Ventures Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Global Energy Ventures to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Global Energy Ventures' cash burn of AU$2.5m is about 5.5% of its AU$45m 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.

So, Should We Worry About Global Energy Ventures' Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Global Energy Ventures' cash burn relative to its market cap was relatively promising. 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 Global Energy Ventures' situation. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Global Energy Ventures (1 can't be ignored!) that you should be aware of before investing here.

Of course Global Energy Ventures 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. 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.
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