Stock Analysis

Here's Why We're Not Too Worried About Fluence's (ASX:FLC) Cash Burn Situation

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ASX:FLC
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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.

Given this risk, we thought we'd take a look at whether Fluence (ASX:FLC) shareholders should 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

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How Long Is Fluence's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of 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. In the last year, its cash burn was US$21m. So it had a cash runway of approximately 12 months from June 2020. Notably, one analyst forecasts that Fluence will break even (at a free cash flow level) in about 16 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.

debt-equity-history-analysis
ASX:FLC Debt to Equity History January 13th 2021

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 while hardly exciting, it was still good to see revenue growth of 2.9% during that time. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing 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.

Can Fluence Raise More Cash Easily?

Fluence seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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. 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.

Fluence has a market capitalisation of US$116m and burnt through US$21m last year, which is 18% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Fluence's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Fluence is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. While its cash runway wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Fluence that investors should know when investing in the stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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