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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Eco (Atlantic) Oil & Gas (CVE:EOG) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Eco (Atlantic) Oil & Gas
When Might Eco (Atlantic) Oil & Gas Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2024, Eco (Atlantic) Oil & Gas had cash of US$3.0m and no debt. Looking at the last year, the company burnt through US$5.3m. Therefore, from March 2024 it had roughly 7 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. The image below shows how its cash balance has been changing over the last few years.
How Is Eco (Atlantic) Oil & Gas' Cash Burn Changing Over Time?
Although Eco (Atlantic) Oil & Gas reported revenue of US$1.7k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. From a cash flow perspective, it's great to see the company's cash burn dropped by 86% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Eco (Atlantic) Oil & Gas Raise Cash?
While we're comforted by the recent reduction evident from our analysis of Eco (Atlantic) Oil & Gas' 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.