Here's Why We're Watching Fertoz's (ASX:FTZ) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Fertoz (ASX:FTZ) stock is up 320% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given its strong share price performance, we think it's worthwhile for Fertoz shareholders to consider whether its cash burn is concerning. 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.

View our latest analysis for Fertoz

When Might Fertoz Run Out Of Money?

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. When Fertoz last reported its balance sheet in December 2021, it had zero debt and cash worth AU$5.2m. Importantly, its cash burn was AU$3.1m over the trailing twelve months. So it had a cash runway of approximately 20 months from December 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Fertoz Growing?

Notably, Fertoz actually ramped up its cash burn very hard and fast in the last year, by 182%, signifying heavy investment in the business. That does give us pause, and we can't take much solace in the operating revenue growth of 10% in the same time frame. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Fertoz is building its business over time.

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

Since Fertoz has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. 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).

Fertoz's cash burn of AU$3.1m is about 6.5% of its AU$48m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Fertoz's Cash Burn Situation?

On this analysis of Fertoz's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Fertoz's situation. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Fertoz (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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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.