We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Predator Oil & Gas Holdings (LON:PRD) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Predator Oil & Gas Holdings

When Might Predator Oil & Gas Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2020, Predator Oil & Gas Holdings had cash of UK£2.1m and no debt. Importantly, its cash burn was UK£417k over the trailing twelve months. Therefore, from June 2020 it had 5.0 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Is Predator Oil & Gas Holdings' Cash Burn Changing Over Time?

Predator Oil & Gas Holdings 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. Notably, its cash burn was actually down by 79% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Predator Oil & Gas Holdings makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For Predator Oil & Gas Holdings To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Predator Oil & Gas Holdings' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of UK£15m, Predator Oil & Gas Holdings' UK£417k in cash burn equates to about 2.7% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Predator Oil & Gas Holdings' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Predator Oil & Gas Holdings' cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, Predator Oil & Gas Holdings has 4 warning signs (and 2 which are a bit unpleasant) 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 companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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