We Think Omega Oil & Gas (ASX:OMA) Needs To Drive Business Growth Carefully

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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Omega Oil & Gas (ASX:OMA) shareholders is whether they should be concerned by its rate of cash burn. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Omega Oil & Gas

How Long Is Omega Oil & Gas' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Omega Oil & Gas last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth AU$19m. Importantly, its cash burn was AU$18m over the trailing twelve months. Therefore, from December 2023 it had roughly 13 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. The image below shows how its cash balance has been changing over the last few years.

How Is Omega Oil & Gas' Cash Burn Changing Over Time?

Although Omega Oil & Gas had revenue of AU$174k in the last twelve months, its operating revenue was only AU$32k in that time period. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. In fact, it ramped its spending strongly over the last year, increasing cash burn by 138%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Admittedly, we're a bit cautious of Omega Oil & Gas 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 Omega Oil & Gas Raise Cash?

While Omega Oil & Gas does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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. 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$42m, Omega Oil & Gas' AU$18m in cash burn equates to about 43% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About Omega Oil & Gas' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Omega Oil & Gas' cash runway was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Omega Oil & Gas (of which 2 are potentially serious!) you should know about.

Of course Omega Oil & Gas 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. 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.