Here's Why We're Not At All Concerned With Invictus Energy's (ASX:IVZ) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Invictus Energy (ASX:IVZ) stock is up 138% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for Invictus Energy shareholders to consider whether its cash burn is concerning. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Invictus Energy

How Long Is Invictus 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. When Invictus Energy last reported its balance sheet in June 2021, it had zero debt and cash worth AU$9.1m. Importantly, its cash burn was AU$2.1m over the trailing twelve months. That means it had a cash runway of about 4.3 years as of June 2021. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Is Invictus Energy's Cash Burn Changing Over Time?

Because Invictus Energy isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. As it happens, the company's cash burn reduced by 13% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Admittedly, we're a bit cautious of Invictus Energy due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Invictus Energy Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Invictus Energy to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Since it has a market capitalisation of AU$88m, Invictus Energy's AU$2.1m in cash burn equates to about 2.4% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Invictus Energy's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Invictus Energy's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, Invictus Energy has 4 warning signs (and 2 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.

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