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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Toro Energy (ASX:TOE) 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
See our latest analysis for Toro Energy
When Might Toro Energy Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, Toro Energy had AU$5.8m in cash, and was debt-free. In the last year, its cash burn was AU$5.3m. That means it had a cash runway of around 13 months as of December 2022. 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.
How Is Toro Energy’s Cash Burn Changing Over Time?
Toro Energy didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 4.5% in the last year, it