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Just because a business does not make any money, does not mean that the stock will go down. 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 Futura Medical (LON:FUM) 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). Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Futura Medical
Does Futura Medical Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2023, Futura Medical had cash of UK£7.7m and no debt. In the last year, its cash burn was UK£936k. Therefore, from December 2023 it had 8.2 years of cash runway. Notably, however, the one analyst we see covering the stock thinks that Futura Medical will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.
How Is Futura Medical's Cash Burn Changing Over Time?
Although Futura Medical had revenue of UK£3.1m in the last twelve months, its operating revenue was only UK£3.1m in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. From a cash flow perspective, it's great to see the company's cash burn dropped by 86% over the last year. That might not be promising when it comes to business development, but it's good for the companies cash preservation. 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 Easily Can Futura Medical Raise Cash?
While we're comforted by the recent reduction evident from our analysis of Futura Medical's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.