Stock Analysis

Companies Like Firebrick Pharma (ASX:FRE) Are In A Position To Invest In Growth

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ASX:FRE
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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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Firebrick Pharma (ASX:FRE) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Firebrick Pharma

When Might Firebrick Pharma Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2022, Firebrick Pharma had cash of AU$7.1m and no debt. In the last year, its cash burn was AU$4.2m. So it had a cash runway of approximately 20 months from June 2022. 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.

debt-equity-history-analysis
ASX:FRE Debt to Equity History August 30th 2022

How Is Firebrick Pharma's Cash Burn Changing Over Time?

In the last year, Firebrick Pharma did book revenue of AU$1.1m, but its revenue from operations was less, at just AU$4.1k. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. In fact, it ramped its spending strongly over the last year, increasing cash burn by 117%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Firebrick Pharma makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Firebrick Pharma Raise Cash?

While Firebrick Pharma does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Firebrick Pharma has a market capitalisation of AU$63m and burnt through AU$4.2m last year, which is 6.7% of the company's market value. 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.

Is Firebrick Pharma's Cash Burn A Worry?

On this analysis of Firebrick Pharma'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 Firebrick Pharma's situation. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Firebrick Pharma (of which 1 is concerning!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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