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Just because a business does not make any money, does not mean that the stock will go down. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should PEDEVCO (NYSEMKT:PED) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might PEDEVCO Run Out Of Money?
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. As at March 2020, PEDEVCO had cash of US$12m and no debt. In the last year, its cash burn was US$39m. So it had a cash runway of approximately 4 months from March 2020. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.
How Well Is PEDEVCO Growing?
At first glance it's a bit worrying to see that PEDEVCO actually boosted its cash burn by 9.7%, year on year. On a more positive note, the operating revenue improved by 161% over the period, offering an indication that the expenditure may well be worthwhile. If revenue is maintained once spending on growth decreases, that could well pay off! It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how PEDEVCO is growing revenue over time by checking this visualization of past revenue growth.
Can PEDEVCO Raise More Cash Easily?
Given the trajectory of PEDEVCO's cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.
PEDEVCO's cash burn of US$39m is about 72% of its US$53m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is PEDEVCO's Cash Burn A Worry?
On this analysis of PEDEVCO's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for PEDEVCO (1 doesn't sit too well with us!) that you should be aware of before investing here.
Of course PEDEVCO may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.