We're Hopeful That CGX Energy (CVE:OYL) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for CGX Energy (CVE:OYL) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for CGX Energy

Does CGX Energy Have A Long 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. When CGX Energy last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth US$6.4m. Looking at the last year, the company burnt through US$5.6m. So it had a cash runway of approximately 14 months from December 2023. 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. The image below shows how its cash balance has been changing over the last few years.

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

Because CGX Energy 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. From a cash flow perspective, it's great to see the company's cash burn dropped by 91% over the last year. That might not be promising when it comes to business development, but it's good for the companies cash preservation. Admittedly, we're a bit cautious of CGX 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.

Can CGX Energy Raise More Cash Easily?

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 has a market capitalisation of US$85m and burnt through US$5.6m last year, which is 6.6% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is CGX Energy's Cash Burn A Worry?

CGX Energy appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash burn relative to its market cap quite good, but its cash burn reduction was a real positive. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, CGX Energy has 4 warning signs (and 3 which make us uncomfortable) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.