Yahoo Finance Here's Why We Worry About TomCo Energy's (LON:TOM) Cash Burn Situation
We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether TomCo Energy (LON:TOM) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for TomCo Energy
How Long Is TomCo Energy's 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. In March 2019, TomCo Energy had UK£245k in cash, and was debt-free. In the last year, its cash burn was UK£1.7m. That means it had a cash runway of around 2 months as of March 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is TomCo Energy's Cash Burn Changing Over Time?
Because TomCo Energy isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Remarkably, it actually increased its cash burn by 344% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. TomCo Energy makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can TomCo Energy Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, TomCo Energy shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
TomCo Energy's cash burn of UK£1.7m is about 87% of its UK£2.0m market capitalisation. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
So, Should We Worry About TomCo Energy's Cash Burn?
There are no prizes for guessing that we think TomCo Energy's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. And although we accept its increasing cash burn wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. Its cash burn burn situation feels about as relaxing as riding your bicycle home in the rain without so much as a jumper. The need for more cash seems just around the corner, and any dilution is likely to be rather severe. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that TomCo Energy insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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