Companies Like Northern Drilling (OB:NODL) Are In A Position To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, Northern Drilling (OB:NODL) shareholders have done very well over the last year, with the share price soaring by 132%. 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.

In light of its strong share price run, we think now is a good time to investigate how risky Northern Drilling's cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Northern Drilling

How Long Is Northern Drilling's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Northern Drilling last reported its balance sheet in June 2021, it had zero debt and cash worth US$14m. In the last year, its cash burn was US$6.7m. So it had a cash runway of about 2.1 years from June 2021. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

Can Northern Drilling Raise More Cash Easily?

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. 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.

Northern Drilling has a market capitalisation of US$22m and burnt through US$6.7m last year, which is 30% 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 Northern Drilling's Cash Burn A Worry?

Because Northern Drilling is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Having said that, we can say that its cash runway was a real positive. To be frank most cash burning companies are relatively risky, but this one seems safer than most, in our view. On another note, Northern Drilling has 4 warning signs (and 2 which make us uncomfortable) 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 interesting companies, 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.
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