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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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Omega Oil & Gas (ASX:OMA) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Omega Oil & Gas
Does Omega Oil & Gas Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2023, Omega Oil & Gas had AU$19m in cash, and was debt-free. In the last year, its cash burn was AU$18m. That means it had a cash runway of around 13 months as of December 2023. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. Depicted below, you can see how its cash holdings have changed over time.
How Is Omega Oil & Gas' Cash Burn Changing Over Time?
Whilst it's great to see that Omega Oil & Gas has already begun generating revenue from operations, last year it only produced AU$32k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 138% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Admittedly, we're a bit cautious of Omega Oil & Gas due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Omega Oil & Gas Raise More Cash Easily?
While Omega Oil & Gas does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).