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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Fluence (ASX:FLC) 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does Fluence Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. Fluence has such a small amount of debt that we’ll set it aside, and focus on the US$20m in cash it held at June 2020. Looking at the last year, the company burnt through US$21m. So it had a cash runway of approximately 12 months from June 2020. Notably, however, the one analyst we see covering the stock thinks that Fluence will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.
How Well Is Fluence Growing?
Happily, Fluence is travelling in the right direction when it comes to its cash burn, which is down 56% over the last year. And it could also show revenue growth of 2.9% in the same period. On balance, we’d say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Fluence To Raise More Cash For Growth?
While Fluence seems to be in a fairly good position, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. 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).
Fluence’s cash burn of US$21m is about 23% of its US$92m market capitalisation. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
How Risky Is Fluence’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Fluence’s cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It’s clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking an in-depth view of risks, we’ve identified 4 warning signs for Fluence that you should be aware of before investing.
Of course Fluence may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. 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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