Trailing twelve-month data shows us that Cluff Natural Resources Plc's (LON:CLNR) earnings loss has accumulated to -UK£2.4m. Although some investors expected this, their belief in the path to profitability for Cluff Natural Resources may be wavering. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Cluff Natural Resources is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Cluff Natural Resources’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
Check out our latest analysis for Cluff Natural Resources
What is cash burn?
With a negative free cash flow of -UK£2.4m, Cluff Natural Resources is chipping away at its UK£642k cash reserves in order to run its business. The biggest threat facing Cluff Natural Resources investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the high-risk energy industry. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will Cluff Natural Resources 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 Cluff Natural Resources has to spend each year in order to keep its business running.
In Cluff Natural Resources’s case, its cash outflows fell by 11% last year, which may signal the company moving towards a more sustainable level of expenses. Given the level of cash left in the bank, if Cluff Natural Resources maintained its cash burn rate of -UK£2.4m, it could still run out of cash within the next few of months. Even though this is analysis is fairly basic, and Cluff Natural Resources still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:
This analysis isn’t meant to deter you from Cluff Natural Resources, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that even if the company maintains this rate of cash burn growth, it will run out of cash within the year. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how CLNR is expected to perform in the future. I recommend you continue to research Cluff Natural Resources to get a more holistic view of the company by looking at: