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Eco (Atlantic) Oil & Gas (CVE:EOG) Is In A Strong Position To Grow Its Business

Simply Wall St

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Eco (Atlantic) Oil & Gas (CVE:EOG) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.

Check out our latest analysis for Eco (Atlantic) Oil & Gas

When Might Eco (Atlantic) Oil & Gas Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Eco (Atlantic) Oil & Gas had CA$31m in cash, and was debt-free. Looking at the last year, the company burnt through CA$2.8m. That means it had a cash runway of very many years as of September 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

TSXV:EOG Historical Debt, December 3rd 2019

How Is Eco (Atlantic) Oil & Gas's Cash Burn Changing Over Time?

Eco (Atlantic) Oil & Gas didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Notably, its cash burn was actually down by 61% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. 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 Eco (Atlantic) Oil & Gas Raise Cash?

While we're comforted by the recent reduction evident from our analysis of Eco (Atlantic) Oil & Gas's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Eco (Atlantic) Oil & Gas's cash burn of CA$2.8m is about 1.7% of its CA$166m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Eco (Atlantic) Oil & Gas's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Eco (Atlantic) Oil & Gas's cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn reduction was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Notably, our data indicates that Eco (Atlantic) Oil & Gas insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

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. Thank you for reading.