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Azincourt Energy Corp. (CVE:AAZ) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 Azincourt Energy is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Azincourt Energy’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
See our latest analysis for Azincourt Energy
What is cash burn?
Currently, Azincourt Energy has CA$1.7m in cash holdings and producing negative free cash flow of -CA$2.8m. The riskiest factor facing investors of Azincourt Energy is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the highly risky energy industry often face this problem, and Azincourt Energy is no exception. 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 Azincourt Energy 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 Azincourt Energy has to spend each year in order to keep its business running.
In Azincourt Energy’s case, its cash outflows fell by 67% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Azincourt Energy’s operations and the company may need to raise more capital within the year. Even though this is analysis is fairly basic, and Azincourt Energy still can cut its overhead further, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Azincourt Energy operation is, and when things may have to change.
Next Steps:
Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. 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. An opportunity may exist for you to enter into the stock at an attractive price, should Azincourt Energy be required to raise new funds to continue operating. I admit this is a fairly basic analysis for AAZ's financial health. Other important fundamentals need to be considered as well. You should continue to research Azincourt Energy to get a better picture of the company by looking at: