Here's Why We're Not Too Worried About Felix Group Holdings' (ASX:FLX) Cash Burn Situation

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Felix Group Holdings (ASX:FLX) 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.

Check out our latest analysis for Felix Group Holdings

Does Felix Group Holdings Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In June 2021, Felix Group Holdings had AU$8.9m in cash, and was debt-free. In the last year, its cash burn was AU$3.0m. Therefore, from June 2021 it had 3.0 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Well Is Felix Group Holdings Growing?

Felix Group Holdings managed to reduce its cash burn by 60% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 2.5% during the same time frame. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how Felix Group Holdings has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Felix Group Holdings Raise Cash?

We are certainly impressed with the progress Felix Group Holdings has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of AU$35m, Felix Group Holdings' AU$3.0m in cash burn equates to about 8.6% of its market value. 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 Felix Group Holdings' Cash Burn?

As you can probably tell by now, we're not too worried about Felix Group Holdings' cash burn. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Felix Group Holdings has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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

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.

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