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We're Keeping An Eye On Europa Oil & Gas (Holdings)'s (LON:EOG) Cash Burn Rate

Simply Wall St

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Europa Oil & Gas (Holdings) (LON:EOG) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Europa Oil & Gas (Holdings)

Does Europa Oil & Gas (Holdings) 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. As at July 2019, Europa Oil & Gas (Holdings) had cash of UK£3.1m and no debt. Looking at the last year, the company burnt through UK£2.6m. That means it had a cash runway of around 14 months as of July 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

AIM:EOG Historical Debt, October 19th 2019

How Well Is Europa Oil & Gas (Holdings) Growing?

At first glance it's a bit worrying to see that Europa Oil & Gas (Holdings) actually boosted its cash burn by 45%, year on year. At least the revenue was up 4.8% during the period, even if it wasn't up by much. Considering both these factors, we're not particularly excited by its growth profile. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Europa Oil & Gas (Holdings) To Raise More Cash For Growth?

While Europa Oil & Gas (Holdings) seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Europa Oil & Gas (Holdings) has a market capitalisation of UK£10m and burnt through UK£2.6m last year, which is 26% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Europa Oil & Gas (Holdings)'s Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Europa Oil & Gas (Holdings)'s cash runway was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Europa Oil & Gas (Holdings) insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

Of course Europa Oil & Gas (Holdings) 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.

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.