Is Baron Oil Plc (LON:BOIL) Growing Too Fast?
Baron Oil Plc (LON:BOIL) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Looking at Baron Oil’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
View our latest analysis for Baron Oil
What is cash burn?
With a negative free cash flow of -UK£3.0m, Baron Oil is chipping away at its UK£605k cash reserves in order to run its business. The riskiest factor facing investors of Baron Oil 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 Baron Oil 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 Baron Oil need to raise more cash?
We can measure Baron Oil's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Free cash outflows grew by 12% over the past year, which is relatively reasonable for a small-cap company. My cash burn analysis suggests that, if Baron Oil continues to spend its cash reserves at this current high rate, it may have to raise capital within the upcoming months, which may be a surprise to some shareholders. Furthermore, even if Baron Oil kept its cash burn current rate of -UK£3.0m, it may need to secure new funding in the next couple of months. Although this is a relatively simplistic calculation, and Baron Oil could reduce its costs or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Baron Oil operation is, and when things may have to change.
Next Steps:
The risks involved in investing in loss-making Baron Oil means you should think twice before diving into the stock. However, this should not prevent you from further researching its investment potential. The cash burn analysis result indicates a cash constraint for the company, due to its high cash burn growth and its level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. This is only a rough assessment of financial health, and BOIL likely also has company-specific issues impacting its cash management decisions. You should continue to research Baron Oil to get a more holistic view of the company by looking at:
Historical Performance: What has BOIL's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Baron Oil’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
