As the AU$57m market cap Blue Energy Limited (ASX:BLU) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Blue Energy is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Blue Energy’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
With a negative free cash flow of -AU$1.7m, Blue Energy is chipping away at its AU$1.8m cash reserves in order to run its business. The biggest threat facing Blue Energy investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the high-risk energy industry. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will Blue Energy need to raise more cash?
One way to measure the cost to Blue Energy of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In Blue Energy’s case, its cash outflows fell by 19% last year, which may signal the company moving towards a more sustainable level of expenses. But, if the company maintains its cash burn at the current level of -AU$1.7m, it may still need additional capital within the next 1 years. Even though this is analysis is fairly basic, and Blue Energy still can cut its overhead further, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Blue Energy operation is, and when things may have to change.
This analysis isn’t meant to deter you from Blue Energy, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at this 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 Blue Energy be required to raise new funds to continue operating. I admit this is a fairly basic analysis for BLU's financial health. Other important fundamentals need to be considered as well. You should continue to research Blue Energy to get a more holistic view of the company by looking at:
- Historical Performance: What has BLU's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Blue Energy’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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