We're Keeping An Eye On RedFlow's (ASX:RFX) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for RedFlow (ASX:RFX) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for RedFlow

Does RedFlow Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, RedFlow had AU$14m in cash, and was debt-free. Importantly, its cash burn was AU$9.6m over the trailing twelve months. So it had a cash runway of approximately 18 months from December 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Is RedFlow's Cash Burn Changing Over Time?

In our view, RedFlow doesn't yet produce significant amounts of operating revenue, since it reported just AU$3.0m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Its cash burn positively exploded in the last year, up 232%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how RedFlow is building its business over time.

How Hard Would It Be For RedFlow To Raise More Cash For Growth?

Given its cash burn trajectory, RedFlow shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. 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.

RedFlow has a market capitalisation of AU$74m and burnt through AU$9.6m last year, which is 13% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is RedFlow's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought RedFlow's cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 4 warning signs for RedFlow (of which 1 shouldn't be ignored!) you should know about.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.