There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should PEDEVCO (NYSEMKT:PED) shareholders be worried about its 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is PEDEVCO's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2020, PEDEVCO had cash of US$12m and no debt. Looking at the last year, the company burnt through US$39m. So it had a cash runway of approximately 4 months from March 2020. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.
How Well Is PEDEVCO Growing?
Some investors might find it troubling that PEDEVCO is actually increasing its cash burn, which is up 9.7% in the last year. On a more positive note, the operating revenue improved by 161% over the period, offering an indication that the expenditure may well be worthwhile. If that revenue does keep flowing reliably, then the company could see a strong improvement in free cash flow simply by reducing growth expenditure. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how PEDEVCO is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For PEDEVCO To Raise More Cash For Growth?
Since PEDEVCO has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
PEDEVCO's cash burn of US$39m is about 72% of its US$53m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
How Risky Is PEDEVCO's Cash Burn Situation?
On this analysis of PEDEVCO's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Separately, we looked at different risks affecting the company and spotted 4 warning signs for PEDEVCO (of which 1 shouldn't be ignored!) you should know about.
Of course PEDEVCO 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. Thank you for reading.
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