We Think Borders & Southern Petroleum (LON:BOR) Needs To Drive Business Growth Carefully

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Borders & Southern Petroleum (LON:BOR) has seen its share price rise 513% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Borders & Southern Petroleum's cash burn is too risky. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Borders & Southern Petroleum

Does Borders & Southern Petroleum Have A Long 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. In December 2021, Borders & Southern Petroleum had US$714k in cash, and was debt-free. Looking at the last year, the company burnt through US$1.4m. That means it had a cash runway of around 6 months as of December 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Is Borders & Southern Petroleum's Cash Burn Changing Over Time?

Because Borders & Southern Petroleum isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. It's possible that the 3.9% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we're a bit cautious of Borders & Southern Petroleum 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 Borders & Southern Petroleum Raise More Cash Easily?

While Borders & Southern Petroleum is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Borders & Southern Petroleum's cash burn of US$1.4m is about 4.0% of its US$36m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Borders & Southern Petroleum's Cash Burn A Worry?

On this analysis of Borders & Southern Petroleum's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Borders & Southern Petroleum (3 don't sit too well with us!) that you should be aware of before investing here.

Of course Borders & Southern Petroleum 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.