Here's Why We're A Bit Worried About Whitebark Energy's (ASX:WBE) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. 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 Whitebark Energy (ASX:WBE) shareholders 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Whitebark Energy
Does Whitebark Energy Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2019, Whitebark Energy had AU$5.6m in cash, and was debt-free. In the last year, its cash burn was AU$6.2m. So it had a cash runway of approximately 11 months from December 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Well Is Whitebark Energy Growing?
Whitebark Energy boosted investment sharply in the last year, with cash burn ramping by 78%. As if that's not bad enough, the operating revenue also dropped by 13%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Whitebark Energy has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Whitebark Energy To Raise More Cash For Growth?
Since Whitebark Energy can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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).
Whitebark Energy has a market capitalisation of AU$14m and burnt through AU$6.2m last year, which is 46% of the company's market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
Is Whitebark Energy's Cash Burn A Worry?
Whitebark Energy is not in a great position when it comes to its cash burn situation. While its cash runway wasn't too bad, its cash burn relative to its market cap does leave us rather nervous. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Whitebark Energy (of which 3 are a bit concerning!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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