We're Not Very Worried About Peninsula Energy's (ASX:PEN) Cash Burn Rate

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, 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Peninsula Energy (ASX:PEN) 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.

View our latest analysis for Peninsula Energy

How Long Is Peninsula Energy's Cash Runway?

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 Peninsula Energy last reported its June 2024 balance sheet in September 2024, it had zero debt and cash worth US$100m. Looking at the last year, the company burnt through US$28m. That means it had a cash runway of about 3.5 years as of June 2024. Notably, however, analysts think that Peninsula Energy will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Well Is Peninsula Energy Growing?

One thing for shareholders to keep front in mind is that Peninsula Energy increased its cash burn by 285% in the last twelve months. And that is all the more of a concern in light of the fact that operating revenue was actually down by 71% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Peninsula Energy To Raise More Cash For Growth?

Even though it seems like Peninsula Energy is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Peninsula Energy's cash burn of US$28m is about 14% of its US$207m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Peninsula Energy's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Peninsula Energy's cash runway was relatively promising. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 1 warning sign for Peninsula Energy that investors should know when investing in the stock.

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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.