Just because a company isn't making profits doesn't mean its stock price will go down. For example, Amazon.com lost money for years after going public, but if you had bought and held the stock since 1999, you could have made a lot of money. But while the successes are well known, investors should not ignore the large number of unprofitable companies that burn through all their cash and go bankrupt.
Considering this risk, I decided to consider the following. toro energy (ASX:TOE) shareholders have cash burn to worry about. In this article, we define cash burn as annual (negative) free cash flow. This is the amount of money a company spends each year to fund growth. First, we compare its cash burn to its cash reserves to calculate its cash runway.
Check out our latest analysis for Toro Energy.
Does Toro Energy have long-term financing potential?
A company's cash runway is the amount of time it takes to use up its cash reserves at its current cash burn rate. As of June 2023, Toro Energy had cash of AU$3.2m and was debt-free. Importantly, its cash burn was AU$5.7m in the trailing twelve months. So we had a funding period of about seven months starting in June 2023. Frankly, this kind of short runway is an indication that a company needs to significantly reduce its cash burn, or else an imminent need for financing, so I We are nervous. The image below shows how its cash balance has changed over the past few years.
How has Toro Energy's cash burn changed over time?
Toro Energy did not record any revenue last year, which indicates that it is an early-stage company that is still developing its business. Nevertheless, we can examine its cash burn trajectory as part of assessing its cash burn situation. It seems like the company is gradually increasing its investment in the business over time, with its cash burn rate increasing by 43% in the last year. That's not necessarily a bad thing, but investors should be mindful of the fact that it shortens the funding runway. Admittedly, Toro Energy doesn't have significant operating income, which makes us a bit wary. Therefore, we typically prioritize stocks on this list of stocks that analysts predict will grow.
How difficult will it be for Toro Energy to raise more capital for growth?
Toro Energy shareholders might want to think ahead about when the company might need to raise more cash, as the company's cash burn is going in the wrong direction. Companies can raise capital through debt or equity. Companies typically sell their new stock to raise cash and fuel growth. By looking at a company's cash burn compared to its market capitalization, insight into how much shareholders will be diluted if the company needs to raise enough cash to cover another year's cash burn. It can be obtained.
Toro Energy's cash burn of A$5.7 million equates to about 12% of its market capitalization of A$50 million. As a result, we'd venture that the company could raise more cash for growth without too much trouble, even at the cost of some dilution.
So should we be worried about Toro Energy's cash burn?
In this analysis of Toro Energy's cash burn, we think its cash burn relative to market capitalization is reassuring, but on the other hand we're a bit concerned about its cash burn. In summary, we think Toro Energy's cash burn is a risk, based on the factors mentioned in this article. Apart from this, we investigated various risks affecting the company and found the following: 5 warning signs for Toro Energy (Two of which make us uncomfortable!) You should know.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.