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As the UK£14m market cap Chariot Oil & Gas Limited (LON:CHAR) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Chariot Oil & Gas is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Chariot Oil & Gas’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
Check out our latest analysis for Chariot Oil & Gas
What is cash burn?
Chariot Oil & Gas currently has US$20m in the bank, with negative free cash flow of -US$11.9m. The riskiest factor facing investors of Chariot Oil & Gas is the potential for the company to run out of cash without the ability to raise more money. Not surprisingly, it is more common to find unprofitable companies in the high-risk energy industry. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Chariot Oil & Gas need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Chariot Oil & Gas has to spend each year in order to keep its business running.
Free cash outflows grew by 15% over the past year, which is relatively reasonable for a small-cap company. But according to my analysis, given the current level of cash reserves, Chariot Oil & Gas can continue to spend at the current rate and should not need to raise further capital for a few years. Although this is a relatively simplistic calculation, and Chariot Oil & Gas could reduce its costs or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Chariot Oil & Gas operation is, and when things may have to change.
Next Steps:
It seems like Chariot Oil & Gas will not need to raise capital anytime soon, even if its strong operational expense continues to grow over the next couple of years. Shareholders may be pleased to know this as it signals that the company still has a strong cash reserve, as well as less likelihood of share dilution from new capital raising. Now that we’ve accounted for cash burn growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven. This is only a rough assessment of financial health, and CHAR likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research Chariot Oil & Gas to get a better picture of the company by looking at: