Will Po Valley Energy (ASX:PVE) Spend Its Cash Wisely?

Just because a business does not make any money, does not mean that the stock will go down. Indeed, Po Valley Energy (ASX:PVE) stock is up 176% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Po Valley Energy's cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Po Valley Energy

SWOT Analysis for Po Valley Energy

Does Po Valley Energy Have A Long 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. In December 2022, Po Valley Energy had €1.5m in cash, and was debt-free. Importantly, its cash burn was €2.7m over the trailing twelve months. Therefore, from December 2022 it had roughly 7 months of cash runway. 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. The image below shows how its cash balance has been changing over the last few years.

How Is Po Valley Energy's Cash Burn Changing Over Time?

While Po Valley Energy did record statutory revenue of €220k over the last year, it didn't have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. In fact, it ramped its spending strongly over the last year, increasing cash burn by 156%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Admittedly, we're a bit cautious of Po Valley 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.

Can Po Valley Energy Raise More Cash Easily?

Given its cash burn trajectory, Po Valley Energy shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 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).

Po Valley Energy has a market capitalisation of €57m and burnt through €2.7m last year, which is 4.7% of the company's market value. 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 Po Valley Energy's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Po Valley Energy's cash burn relative to its market cap was relatively promising. Summing up, we think the Po Valley Energy's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Po Valley Energy (3 are potentially serious!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.