How Long Will Loss-Making Petratherm Limited (ASX:PTR) Survive?

As the AU$7.01M market cap Petratherm Limited (ASX:PTR) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Petratherm is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Petratherm’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for Petratherm

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Petratherm has AU$632.23K in cash holdings and producing negative cash flows from its day-to-day activities of -AU$336.93K. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Petratherm operates in the renewable electricity industry, which delivered positive earnings in the past year. This means, on average, its industry peers operating are profitable. Petratherm runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.

ASX:PTR Income Statement May 26th 18
ASX:PTR Income Statement May 26th 18

When will Petratherm need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Petratherm to continue its operations. In this case I’ve only accounted for sales, general and admin (SG&A) expenses, and basic R&D expenses incurred within this year. In Petratherm’s case, its opex fell by 25.00% last year, which may signal the company moving towards a more sustainable level of expenses. If the company does not increase its opex next year and remains at the current level of AU$156.24K, then it should not need to raise further capital for the next few years. Although this is a relatively simplistic calculation, and Petratherm may continue to reduce its costs further or open a new line of credit instead of issuing new equity shares, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.

Next Steps:

Investors can breathe easy knowing that Petratherm probably won’t be coming to market any time soon. Though, there are many factors that we haven’t considered in our basic analysis, this outcome gives a relatively broad overview of the company’s cash financial situation. In addition to this analysis, I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well. This is only a rough assessment of financial health, and I’m sure PTR has company-specific issues impacting its cash management decisions. You should continue to research Petratherm to get a more holistic view of the company by looking at:
  1. Historical Performance: What has PTR’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Petratherm’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.