CGX Energy (CVE:OYL) Is In A Strong Position To Grow Its Business

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether CGX Energy (CVE:OYL) 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'. 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 CGX Energy

How Long Is CGX Energy's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2023, CGX Energy had cash of US$13m and no debt. Importantly, its cash burn was US$2.2m over the trailing twelve months. So it had a cash runway of about 5.9 years from June 2023. 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. You can see how its cash balance has changed over time in the image below.

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

CGX Energy didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. From a cash flow perspective, it's great to see the company's cash burn dropped by 98% over the last year. 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 CGX Energy due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

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

There's no doubt CGX Energy's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

CGX Energy's cash burn of US$2.2m is about 0.8% of its US$263m market capitalisation. 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.

So, Should We Worry About CGX Energy's Cash Burn?

As you can probably tell by now, we're not too worried about CGX Energy's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Separately, we looked at different risks affecting the company and spotted 3 warning signs for CGX Energy (of which 2 are a bit concerning!) you should know about.

Of course CGX 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.

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.