There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Phoslock Environmental Technologies (ASX:PET) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Phoslock Environmental Technologies

When Might Phoslock Environmental Technologies Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Phoslock Environmental Technologies had cash of AU$18m and no debt. Looking at the last year, the company burnt through AU$7.9m. So it had a cash runway of about 2.2 years from June 2022. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Well Is Phoslock Environmental Technologies Growing?

In the last twelve months, Phoslock Environmental Technologies kept its cash burn steady. And so too did its operating revenue, which is hardly exciting. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Phoslock Environmental Technologies has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Phoslock Environmental Technologies To Raise More Cash For Growth?

Phoslock Environmental Technologies seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Phoslock Environmental Technologies' cash burn of AU$7.9m is about 24% of its AU$33m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Phoslock Environmental Technologies' Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Phoslock Environmental Technologies' cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Phoslock Environmental Technologies (of which 2 are a bit concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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