Companies Like Bannerman Energy (ASX:BMN) Are In A Position To Invest In Growth

editorial-team@simplywallst.com (Simply Wall St)

Thu, Oct 17, 2024, 3:21 PM 4 min read

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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Bannerman Energy (ASX:BMN) 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. 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 Bannerman Energy

How Long Is Bannerman Energy's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2024, Bannerman Energy had AU$24m in cash, and was debt-free. In the last year, its cash burn was AU$18m. Therefore, from June 2024 it had roughly 16 months of cash runway. Importantly, analysts think that Bannerman Energy will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis — ASX:BMN Debt to Equity History October 17th 2024

How Is Bannerman Energy's Cash Burn Changing Over Time?

Because Bannerman Energy isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 96%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Bannerman Energy Raise More Cash Easily?

Given its cash burn trajectory, Bannerman Energy shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and 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).

Since it has a market capitalisation of AU$577m, Bannerman Energy's AU$18m in cash burn equates to about 3.2% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Bannerman Energy's Cash Burn?

On this analysis of Bannerman Energy's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Bannerman Energy's situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Bannerman Energy (2 don't sit too well with us!) that you should be aware of before investing here.

Of course Bannerman Energy 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 with high insider ownership.

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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.