Will Falcon Oil & Gas (CVE:FO) Spend Its Cash Wisely?

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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Falcon Oil & Gas (CVE:FO) shareholders should 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Falcon Oil & Gas

When Might Falcon Oil & Gas Run Out Of Money?

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 2024, Falcon Oil & Gas had cash of US$12m and no debt. Importantly, its cash burn was US$13m over the trailing twelve months. So it had a cash runway of approximately 11 months from June 2024. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Is Falcon Oil & Gas' Cash Burn Changing Over Time?

Because Falcon Oil & Gas isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Its cash burn positively exploded in the last year, up 534%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Falcon Oil & Gas To Raise More Cash For Growth?

Given its cash burn trajectory, Falcon Oil & Gas shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Falcon Oil & Gas' cash burn of US$13m is about 17% of its US$78m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Falcon Oil & Gas' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Falcon Oil & Gas' cash burn relative to its market cap was relatively promising. Summing up, we think the Falcon Oil & Gas' cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 5 warning signs for Falcon Oil & Gas you should be aware of, and 3 of them are a bit concerning.

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.

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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.