We're Keeping An Eye On Loop Energy's (TSE:LPEN) Cash Burn Rate

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Loop Energy (TSE:LPEN) shareholders be worried about its cash burn? 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'.

Check out our latest analysis for Loop Energy

How Long Is Loop Energy's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at March 2022, Loop Energy had cash of CA$56m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CA$33m. That means it had a cash runway of around 20 months as of March 2022. 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. Depicted below, you can see how its cash holdings have changed over time.

How Is Loop Energy's Cash Burn Changing Over Time?

Whilst it's great to see that Loop Energy has already begun generating revenue from operations, last year it only produced CA$1.6m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 156% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

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

While Loop Energy does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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.

Loop Energy has a market capitalisation of CA$77m and burnt through CA$33m last year, which is 43% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

Is Loop Energy's Cash Burn A Worry?

On this analysis of Loop Energy's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Loop Energy's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 4 warning signs for Loop Energy you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course Loop 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.