Stock Analysis

We Think Norwest Energy (ASX:NWE) Can Easily Afford To Drive Business Growth

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ASX:NWE
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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, Norwest Energy (ASX:NWE) shareholders have done very well over the last year, with the share price soaring by 267%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Norwest Energy's cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Norwest Energy

When Might Norwest Energy Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Norwest Energy last reported its balance sheet in December 2020, it had zero debt and cash worth AU$2.6m. Importantly, its cash burn was AU$870k over the trailing twelve months. So it had a cash runway of about 3.0 years from December 2020. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:NWE Debt to Equity History July 16th 2021

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

Although Norwest Energy reported revenue of AU$282k last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 43% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Norwest Energy due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Norwest Energy Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Norwest Energy 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. 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).

Norwest Energy's cash burn of AU$870k is about 1.6% of its AU$56m market capitalisation. 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.

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

It may already be apparent to you that we're relatively comfortable with the way Norwest Energy is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn reduction was very encouraging. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Norwest Energy (2 can't be ignored!) that you should be aware of before investing here.

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)

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