Can Ratio Petroleum Energy - Limited Partnership (TLV:RTPT.L) Afford To Invest In Growth?

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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Ratio Petroleum Energy - Limited Partnership (TLV:RTPT.L) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Ratio Petroleum Energy - Limited Partnership

Does Ratio Petroleum Energy - Limited Partnership 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. In March 2021, Ratio Petroleum Energy - Limited Partnership had US$14m in cash, and was debt-free. In the last year, its cash burn was US$22m. That means it had a cash runway of around 8 months as of March 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Is Ratio Petroleum Energy - Limited Partnership's Cash Burn Changing Over Time?

Ratio Petroleum Energy - Limited Partnership 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. As it happens, the company's cash burn reduced by 3.5% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Admittedly, we're a bit cautious of Ratio Petroleum Energy - Limited Partnership 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 Ratio Petroleum Energy - Limited Partnership Raise Cash?

While Ratio Petroleum Energy - Limited Partnership 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.

Ratio Petroleum Energy - Limited Partnership's cash burn of US$22m is about 42% of its US$52m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

Is Ratio Petroleum Energy - Limited Partnership's Cash Burn A Worry?

On this analysis of Ratio Petroleum Energy - Limited Partnership's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. 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, Ratio Petroleum Energy - Limited Partnership has 4 warning signs (and 2 which are significant) we think you should know about.

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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