Camber Energy Inc (AMEX:CEI) continues its loss-making streak, announcing a -$89.12M 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. Today I’ve examined CEI’s financial data to roughly assess when the company may need to raise new capital. See our latest analysis for CEI
What is cash burn?
Currently, CEI has $0.71M in cash holdings and producing negative cash flows from its day-to-day activities of -$6.39M. The riskiest factor facing investors of CEI 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 CEI 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 CEI need to raise more cash?
Opex (excluding one-offs) grew by 49.77% over the past year, which is considerably high. My cash burn analysis suggests that, if CEI continues to spend its cash reserves at this current high rate, it’ll have to raise capital within the next 2 months, which may be a surprise to some shareholders. Furthermore, even if CEI kept its opex level at the current $4M, it will still be coming to market in the next couple of months. Although this is a relatively simplistic calculation, and CEI may reduce its costs or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the CEI’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? If CEI makes up a reasonable portion of your portfolio, it’s always wise to consider cushioning your holdings with less risky, profitable stocks. You now have a better understanding of the risks you may face holding onto the stock, since we know the company could potentially run into some issues in the next couple of months. In addition to this analysis, I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well.
Are you a potential investor? Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that if CEI were to continue to grow its opex at a double-digit rate, it will not be able to sustain its operations given the current level of cash reserves. An opportunity may exist for you to enter into the stock at an attractive price, should CEI come to market to fund its operations.
Good management manages cash well – have a peek at CEI’s CEO experience and the tenure of the board here. If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio..
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.