We're Hopeful That Red Sky Energy (ASX:ROG) Will Use Its Cash Wisely

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 software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Red Sky Energy (ASX:ROG) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Red Sky Energy

How Long Is Red Sky 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. In December 2023, Red Sky Energy had AU$2.7m in cash, and was debt-free. In the last year, its cash burn was AU$1.5m. Therefore, from December 2023 it had roughly 21 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Is Red Sky Energy's Cash Burn Changing Over Time?

Whilst it's great to see that Red Sky Energy has already begun generating revenue from operations, last year it only produced AU$358k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 47% over the last year suggests some degree of prudence. Red Sky Energy makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Red Sky Energy Raise Cash?

While Red Sky Energy is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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.

Red Sky Energy has a market capitalisation of AU$33m and burnt through AU$1.5m last year, which is 4.6% 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.

How Risky Is Red Sky Energy's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Red Sky Energy is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash runway wasn't quite as good, but was still rather encouraging! Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Red Sky Energy has 6 warning signs (and 4 which can't be ignored) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.