Here's Why Predator Oil & Gas Holdings (LON:PRD) Must Use Its Cash Wisely

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 should Predator Oil & Gas Holdings (LON:PRD) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Predator Oil & Gas Holdings

When Might Predator Oil & Gas Holdings Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2023, Predator Oil & Gas Holdings had cash of UK£6.5m and no debt. Importantly, its cash burn was UK£9.7m over the trailing twelve months. Therefore, from December 2023 it had roughly 8 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

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

Because Predator Oil & Gas Holdings 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. Its cash burn positively exploded in the last year, up 205%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Predator Oil & Gas Holdings makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Predator Oil & Gas Holdings Raise Cash?

Since its cash burn is moving in the wrong direction, Predator Oil & Gas Holdings shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Predator Oil & Gas Holdings has a market capitalisation of UK£53m and burnt through UK£9.7m last year, which is 18% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Predator Oil & Gas Holdings' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Predator Oil & Gas Holdings' cash burn relative to its market cap was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, Predator Oil & Gas Holdings has 6 warning signs (and 3 which are potentially serious) 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 companies with significant insider holdings, 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.