Will Borders & Southern Petroleum (LON:BOR) Spend Its Cash Wisely?

By
Simply Wall St
Published
April 16, 2020
AIM:BOR

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Borders & Southern Petroleum (LON:BOR) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.

See our latest analysis for Borders & Southern Petroleum

Does Borders & Southern Petroleum Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, Borders & Southern Petroleum had US$3.7m in cash, and was debt-free. In the last year, its cash burn was US$1.9m. That means it had a cash runway of around 23 months as of December 2019. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

AIM:BOR Historical Debt April 16th 2020
AIM:BOR Historical Debt April 16th 2020

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. Even though it doesn't get us excited, the 23% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of Borders & Southern Petroleum 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 Easily Can Borders & Southern Petroleum Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Borders & Southern Petroleum to raise more cash in the future. 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 to drive 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).

Borders & Southern Petroleum has a market capitalisation of US$6.0m and burnt through US$1.9m last year, which is 31% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

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

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Borders & Southern Petroleum's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Borders & Southern Petroleum's situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Borders & Southern Petroleum (of which 1 is significant!) 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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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