Companies Like Ratio Petroleum Energy - Limited Partnership (TLV:RTPT.L) Could Be Quite Risky

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

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. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

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

When Might Ratio Petroleum Energy - Limited Partnership Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Ratio Petroleum Energy - Limited Partnership had US$9.9m in cash, and was debt-free. In the last year, its cash burn was US$19m. So it had a cash runway of approximately 6 months from December 2020. 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 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. 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. During the last twelve months, its cash burn actually ramped up 95%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. 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 Hard Would It Be For Ratio Petroleum Energy - Limited Partnership To Raise More Cash For Growth?

Since its cash burn is moving in the wrong direction, Ratio Petroleum Energy - Limited Partnership shareholders may wish to think ahead to when the company may need to raise more cash. 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 has a market capitalisation of US$86m and burnt through US$19m last year, which is 22% 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.

So, Should We Worry About Ratio Petroleum Energy - Limited Partnership's Cash Burn?

Ratio Petroleum Energy - Limited Partnership is not in a great position when it comes to its cash burn situation. While its cash burn relative to its market cap wasn't too bad, its cash runway does leave us rather nervous. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Ratio Petroleum Energy - Limited Partnership (of which 1 makes us a bit uncomfortable!) you should know about.

Of course Ratio Petroleum Energy - Limited Partnership 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. 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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