Is Frontier Digital Ventures Limited (ASX:FDV) Growing Too Fast?

As the AU$141.81M market cap Frontier Digital Ventures Limited (ASX:FDV) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Looking at Frontier Digital Ventures’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. See our latest analysis for Frontier Digital Ventures

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Frontier Digital Ventures has AU$12.90M in cash holdings and producing negative cash flows from its day-to-day activities of -AU$7.01M. The cash burn rate refers to the rate at which the company uses up its supply of cash over time. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. Not surprisingly, it is more common to find unprofitable companies in the high-growth tech industry. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

ASX:FDV Income Statement Apr 12th 18
ASX:FDV Income Statement Apr 12th 18

When will Frontier Digital Ventures need to raise more cash?

Operational expenses, or opex for short, are the bare minimum expenses for Frontier Digital Ventures to continue its operations. In this case I’ve only accounted for sales, general and admin (SG&A) expenses, and basic R&D expenses incurred within this year. Opex (excluding one-offs) grew by 73.53% over the past year, which is considerably high. According to my analysis, if Frontier Digital Ventures continues to grow at this rate, it will burn through its cash reserves by the next 1.4 years and may be coming to market again. Not the best news for shareholders. Though, if Frontier Digital Ventures kept its opex level at AU$9.13M, it will still come to market within the next couple of years, but slightly later. Although this is a relatively simplistic calculation, and Frontier Digital Ventures may reduce its costs or raise debt capital instead of coming to equity markets, the analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.

Next Steps:

Loss-making companies are a risky play, especially those that are still growing its opex at a high rate. Though, this shouldn’t discourage you from considering entering the stock in the future. The outcome of my analysis suggests that if the company maintains the rate of opex growth, it will run out of cash in the upcoming years. An opportunity may exist for you to enter into the stock at an attractive price, should Frontier Digital Ventures come to market to fund its operations. Keep in mind I haven’t considered other factors such as how FDV is expected to perform in the future. I recommend you continue to research Frontier Digital Ventures to get a better picture of the company by looking at:
  1. Future Outlook: What are well-informed industry analysts predicting for FDV’s future growth? Take a look at our free research report of analyst consensus for FDV’s outlook.
  2. Valuation: What is FDV worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FDV is currently mispriced by the market.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.