We're Interested To See How Carnegie Clean Energy (ASX:CCE) Uses Its Cash Hoard To Grow

We can readily understand why investors are attracted to unprofitable companies. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Carnegie Clean Energy (ASX:CCE) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out the opportunities and risks within the AU Renewable Energy industry.

How Long Is Carnegie Clean Energy's 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 June 2022, Carnegie Clean Energy had cash of AU$4.1m and no debt. Looking at the last year, the company burnt through AU$51k. That means it had a cash runway of very many years as of June 2022. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Is Carnegie Clean Energy's Cash Burn Changing Over Time?

In our view, Carnegie Clean Energy doesn't yet produce significant amounts of operating revenue, since it reported just AU$322k in the last twelve months. 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. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 96% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we're a bit cautious of Carnegie Clean Energy 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 Hard Would It Be For Carnegie Clean Energy To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Carnegie Clean Energy's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. 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.

Carnegie Clean Energy has a market capitalisation of AU$31m and burnt through AU$51k last year, which is 0.2% of the company's 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.

Is Carnegie Clean Energy's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Carnegie Clean Energy is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Carnegie Clean Energy (2 are a bit concerning!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.