We Think Carnegie Clean Energy (ASX:CCE) Can Easily Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Carnegie Clean Energy (ASX:CCE) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Carnegie Clean Energy

Does Carnegie Clean Energy Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2021, Carnegie Clean Energy had cash of AU$4.7m and no debt. Looking at the last year, the company burnt through AU$565k. So it had a cash runway of about 8.3 years from December 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

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

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of AU$45m, Carnegie Clean Energy's AU$565k in cash burn equates to about 1.2% of its market value. 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.

How Risky Is Carnegie Clean Energy's Cash Burn Situation?

Because Carnegie Clean Energy is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Having said that, we can say that its cash runway was a real positive. Overall, we think its cash burn seems perfectly reasonable, and we are not concerned by it. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Carnegie Clean Energy (of which 2 are a bit concerning!) you should know about.

Of course Carnegie Clean Energy 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.