We Think FINEOS Corporation Holdings (ASX:FCL) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. 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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should FINEOS Corporation Holdings (ASX:FCL) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for FINEOS Corporation Holdings

SWOT Analysis for FINEOS Corporation Holdings

How Long Is FINEOS Corporation Holdings' 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. FINEOS Corporation Holdings has such a small amount of debt that we'll set it aside, and focus on the €24m in cash it held at December 2022. In the last year, its cash burn was €22m. That means it had a cash runway of around 13 months as of December 2022. Notably, analysts forecast that FINEOS Corporation Holdings will break even (at a free cash flow level) in about 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is FINEOS Corporation Holdings Growing?

FINEOS Corporation Holdings reduced its cash burn by 8.6% during the last year, which points to some degree of discipline. However, operating revenue was basically flat over that time period. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can FINEOS Corporation Holdings Raise Cash?

Even though it seems like FINEOS Corporation Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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. 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.

FINEOS Corporation Holdings' cash burn of €22m is about 6.5% of its €342m 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.

So, Should We Worry About FINEOS Corporation Holdings' Cash Burn?

FINEOS Corporation Holdings appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash burn reduction, while on the other it can also boast very strong cash burn relative to its market cap. One real positive is that analysts are forecasting that the company will reach breakeven. 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 FINEOS Corporation Holdings' situation. Notably, our data indicates that FINEOS Corporation Holdings insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course FINEOS Corporation Holdings 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. 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.