Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 should Formycon (ETR:FYB) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Formycon
Does Formycon Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2023, Formycon had cash of €37m and no debt. Importantly, its cash burn was €54m over the trailing twelve months. That means it had a cash runway of around 8 months as of June 2023. Importantly, analysts think that Formycon will reach cashflow breakeven in 2 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Formycon Growing?
Notably, Formycon actually ramped up its cash burn very hard and fast in the last year, by 172%, signifying heavy investment in the business. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 99%. Considering both these factors, we're not particularly excited by its growth profile. While the past is always worth studying, it is the future that matters most of all. 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 Formycon Raise Cash?
Since Formycon has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
Formycon's cash burn of €54m is about 5.6% of its €970m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.