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.

Given this risk, we thought we'd take a look at whether Helios Energy (ASX:HE8) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Helios Energy

When Might Helios Energy Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at June 2021, Helios Energy had cash of AU$9.9m and no debt. Importantly, its cash burn was AU$3.1m over the trailing twelve months. So it had a cash runway of about 3.1 years from June 2021. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time. debt-equity-history-analysis

How Is Helios Energy's Cash Burn Changing Over Time?

In our view, Helios Energy doesn't yet produce significant amounts of operating revenue, since it reported just AU$20k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Notably, its cash burn was actually down by 69% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Admittedly, we're a bit cautious of Helios Energy due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.



How Hard Would It Be For Helios Energy To Raise More Cash For Growth?

There's no doubt Helios Energy's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Helios Energy has a market capitalisation of AU$240m and burnt through AU$3.1m last year, which is 1.3% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Helios Energy's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Helios Energy's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn reduction was also very reassuring. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking a deeper dive, we've spotted  4 warning signs for Helios Energy you should be aware of, and 2 of them can't be ignored.

Of course Helios Energy may not be the best stock to buy. So you may wish to see this freecollection of companies boasting high return on equity, or this list of stocks that insiders are buying.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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