Here's Why We're Not Too Worried About Predator Oil & Gas Holdings' (LON:PRD) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Predator Oil & Gas Holdings (LON:PRD) stock is up 422% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Predator Oil & Gas Holdings' cash burn is. 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. 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 Predator Oil & Gas Holdings

Does Predator Oil & Gas Holdings 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 2020, Predator Oil & Gas Holdings had UK£1.3m in cash, and was debt-free. Looking at the last year, the company burnt through UK£984k. That means it had a cash runway of around 16 months as of December 2020. 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. 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?

Predator Oil & Gas Holdings 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. Even though it doesn't get us excited, the 52% reduction in cash burn year on year does suggest the company can continue operating for quite some time. 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 Hard Would It Be For Predator Oil & Gas Holdings To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Predator Oil & Gas Holdings' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of UK£45m, Predator Oil & Gas Holdings' UK£984k in cash burn equates to about 2.2% of its market value. 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 Predator Oil & Gas Holdings' Cash Burn?

The good news is that in our view Predator Oil & Gas Holdings' cash burn situation gives shareholders real reason for optimism. Not only was its cash burn reduction quite good, but its cash burn relative to its market cap 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. Taking a deeper dive, we've spotted 4 warning signs for Predator Oil & Gas Holdings you should be aware of, and 1 of them doesn't sit too well with us.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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. 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.
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