Editor's note: The original version of this article did not include the cash proceeds of a secondary offering made in May by Syntax-Brillian (NASDAQ:BRLC). Because the cash raised by the secondary offering modifies the previous figures, the company has been excluded from this corrected article. We regret the error. 

Although the burned hand learns best, we shouldn't have to wear oven mitts to cook up a decent return on our investments. The excitement of getting in early on the next hot growth stock or catching an established company rebounding from a bad fall continuously lures us into the hothouse of the marketplace. The goal is to find those companies that really are ready to shake and bake, as opposed to those that will simply singe our portfolios.

So let's don our asbestos aprons and whip up some lessons to keep us from getting burned. We'll check on some of Mr. Market's favorites and see how fast they're burning through their cash. Then we'll consult Motley Fool CAPS to see which of these stocks Foolish investors think are overdone.

Blackened or burnt?
A company's cash burn rate measures how fast it's using up its cash. The business can look profitable on paper while actually sucking the company dry of cash. That's why Fools focus on the cash flow statement more than the income statement.

We'll compare how much cash a company has on its balance sheet with how fast it's burning through it to see just how many months it has before it will need to raise more.

Cash Burn*

Cash and Equivalents

Months of Cash

CAPS Rating (out of 5)

Dendreon (DNDN)





InterOil (IOC)





Yamana Gold (AUY)





Cash burn is monthly negative trailing-12-months free cash flow. Cash and equivalents is in millions. Months of cash is cash/cash burn. CAPS Ratings from Motley Fool CAPS.

So few options, so little time
Not every company with high cash burn rates is going to go bankrupt, but these companies do become riskier. Those that find themselves burning through their cash too quickly, however, only have a handful of options:

  • Generate more cash
  • Sell assets
  • Raise more cash through equity or debt offerings
  • Get bought out
  • File for bankruptcy

Crispy critters
While Yamana Gold doesn't lead the list of companies that appear to be heading toward running out of cash, registering just a little less than five months' worth of cash available, our CAPS community still solidly supports the gold miner, bestowing a four-star rating on it.

In fact, the company continues to mine the competition for opportunity, with a proposed three-way deal in which it would first acquire Northern Orion Resources (NTO) and then take over Meridian Gold (MDG). A formal proposal has been made for the first part of the deal, but nothing concrete has been offered for the second.

CAPS investors say Yamana's value is found in what remains underground. CAPS player klova says, "Q1 2007 Yamana's Chapada gold and copper mine start[s] full-scale commercial production. Management expects to achieve an annual production rate of 600,000 ounces of gold by the end of 2007, and reach an annual rate of one million ounces by late 2008.This will be a true money or gold machine. Yamana is also no-hedge gold company."

No, the vitriol for these cash burnout candidates is saved for oil and gas exploration and production company InterOil. More than 260 investors have rated the Australian company, and nearly three-quarters say it will underperform the market. In fact, more than half of those who rate the company as losing to the market are considered All-Stars -- professional and novice investors who consistently outperform their peers over time.

Top-rated bear ctmedic00, whose rating is better than 99.88% of all CAPS investors, is particularly clear on why he expects InterOil to fail.

Hey, it's an oil company, no wait it's a gas company, no wait it's an overvalued rock. Gas in PNG [Papua New Guinea]? Surprise ... nope there's plenty of gas there and XOM [ExxonMobil] appears to be a possible player in that area. Cheetah gas and oil has a stake in PNG, and oh wait you've never heard of them ... likely it will stay that way. Do a little research and see who has left PNG because the gas [is] stranded with no reasonable way of getting it to someone who might buy it. No pipeline, no nada. Sure Merrill and Druckenmiller are playing in this sandbox, and I hate to be the cat, but remember the analysts at Raymond James aren't your friends, and there's no reason that they aren't giving us a Blodgett. This will flow down the road to bankruptcy, but it may just take a while longer.

Soup's on!
You've heard from the CAPS All-Stars, and you can read their pitches in full at Motley Fool CAPS. Plus, you can stir the pot by telling the CAPS community what you have to say. There's no such thing as having too many cooks to spoil the CAPS soup; more participation just improves the flavor. So get in the mix right away with your free registration.

The Motley Fool Inside Value service looks for unloved stocks that are poised for a comeback. A 30-day risk-free trial gives you access to all the market-beating stocks.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.