Yahoo Finance Is This A Catalyst To Buy Bahamas Petroleum Company plc (LON:BPC)?
Bahamas Petroleum Company plc (LON:BPC) continues its loss-making streak, announcing negative earnings for its latest financial year ending. 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 Bahamas Petroleum is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Bahamas Petroleum’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
See our latest analysis for Bahamas Petroleum
What is cash burn?
Currently, Bahamas Petroleum has US$2.2m in cash holdings and producing negative free cash flow of -US$2.8m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. 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 Bahamas Petroleum need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Bahamas Petroleum has to spend each year in order to keep its business running.
In the past year, free cash outflows (excluding one-offs) rose by 26%, which is high. Not surprisingly, if Bahamas Petroleum continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to raise capital within the next few months, given its current level of cash reserves. This is also the case if Bahamas Petroleum maintains its cash burn rate of -US$2.8m, without growth, going forward. Even though this is analysis is fairly basic, and Bahamas Petroleum still can cut its overhead in the near future, or borrow money instead of raising new equity capital, the outcome of this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:
Loss-making companies are riskier, especially those that are still growing its cash burn at a high rate. This doesn't mean you should avoid a loss-making stock forever - but it's something to be aware of. Now you know that if the company was to continue to grow its cash burn rapidly, it may not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. This is only a rough assessment of financial health, and BPC likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research Bahamas Petroleum to get a better picture of the company by looking at:
Historical Performance: What has BPC'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 Bahamas Petroleum’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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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.
