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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for TAG Oil (CVE:TAO) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for TAG Oil

How Long Is TAG Oil's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2023, TAG Oil had cash of CA$23m and no debt. Importantly, its cash burn was CA$21m over the trailing twelve months. Therefore, from September 2023 it had roughly 13 months of cash runway. Notably, one analyst forecasts that TAG Oil will break even (at a free cash flow level) in about 19 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. The image below shows how its cash balance has been changing over the last few years.

How Is TAG Oil's Cash Burn Changing Over Time?

In our view, TAG Oil doesn't yet produce significant amounts of operating revenue, since it reported just CA$569k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Remarkably, it actually increased its cash burn by 429% 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. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For TAG Oil To Raise More Cash For Growth?

Given its cash burn trajectory, TAG Oil shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).