It’s easy to see why investors are attracted to unprofitable companies. Biotechnology and mining companies, for example, often lose money for years before they succeed with a new treatment or mineral discovery. But while the successes are well known, investors shouldn’t ignore the many unprofitable companies that simply burn through all their cash and go bust.

This should also Omega Oil & Gas (ASX:OMA) Shareholders concerned about cash burn? In this article, we define cash burn as annual (negative) free cash flow, which is the amount a company spends each year to fund its growth. First, we determine its cash runway by comparing its cash burn to its cash reserves.

Check out our latest analysis for Omega Oil & Gas

Does Omega Oil & Gas have a long cash runway?

A company’s cash runway is calculated by dividing its cash holdings by its cash burn. As of December 2023, Omega Oil & Gas had AU$19m in cash and was debt-free. Over the last year, its cash burn was AU$18m. This means it had a cash runway of about 13 months as of December 2023. While this cash runway isn’t too concerning, sensible holders would look further ahead and consider what happens if the company runs out of cash. However, we should note that if we extrapolate recent cash burn trends, its cash runway would get a lot longer. In the image below, you can see how its cash holdings have changed over time.

How does Omega Oil & Gas’s cash burn change over time?

While it’s great that Omega Oil & Gas has already started generating revenue from operations, the company only generated AU$32k last year, so we don’t expect it to generate significant revenue at this time. Therefore, for this analysis, we’ll focus on how its cash burn is performing. The rapid 138% year-on-year increase in cash burn is certainly a test of nerves for us. It’s safe to say that such an increase cannot be sustained for very long without putting a strain on the balance sheet. Admittedly, we’re a little cautious on Omega Oil & Gas due to its lack of significant operating revenue. Therefore, we generally prefer stocks from this list of stocks where analysts are forecasting growth.

Can Omega Oil & Gas easily raise more money?

While Omega Oil & Gas has solid cash headroom, its cash burn trajectory could have some shareholders concerned about when the company might need to raise more cash. Issuing new shares or taking on debt are the most common ways for a publicly traded company to raise more money for its business. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (assuming the same cash burn rate).

Omega Oil & Gas has a market capitalization of AU$53 million and burned through AU$18 million last year, representing 34% of the company’s market value. That’s a pretty high cash burn, so if the company had to sell shares to cover the costs of operating for another year, shareholders would suffer costly dilution.

So should we be worried about Omega Oil & Gas’s cash burn?

Although the increasing cash burn worries us a little, we must mention that we found Omega Oil & Gas’s cash runway to be relatively promising. In summary, we believe Omega Oil & Gas’s cash burn is a risk due to the factors mentioned in this article. Separately, we have looked at various risks affecting the company and found 4 warning signs for Omega Oil & Gas (3 of which make us uncomfortable!) that you should know about.

If you would rather try another company with better fundamentals, don’t miss this free List of interesting companies with HIGH return on equity and low debt or this list of stocks forecast to grow.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.