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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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Jersey Oil and Gas (LON:JOG) shareholders be worried about its 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. Let's start with an examination of the business' cash, relative to its cash burn.
When Might Jersey Oil and Gas Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2024, Jersey Oil and Gas had cash of UK£12m and no debt. In the last year, its cash burn was UK£4.1m. Therefore, from December 2024 it had 3.0 years of cash runway. Notably, however, analysts think that Jersey Oil and Gas will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.
Check out our latest analysis for Jersey Oil and Gas
How Is Jersey Oil and Gas' Cash Burn Changing Over Time?
Because Jersey Oil and Gas 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. As it happens, the company's cash burn reduced by 19% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Jersey Oil and Gas Raise Cash?
While Jersey Oil and Gas is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.