Companies Like Radio Fuels Energy (CSE:CAKE) Can Afford To Invest In Growth

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?

Given this risk, we thought we'd take a look at whether Radio Fuels Energy (CSE:CAKE) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Radio Fuels Energy

Does Radio Fuels Energy Have A Long 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. When Radio Fuels Energy last reported its November 2023 balance sheet in February 2024, it had zero debt and cash worth CA$21m. Looking at the last year, the company burnt through CA$280k. That means it had a cash runway of very many years as of November 2023. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

How Is Radio Fuels Energy's Cash Burn Changing Over Time?

Because Radio Fuels Energy isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Notably, its cash burn was actually down by 66% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Radio Fuels Energy 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 Hard Would It Be For Radio Fuels Energy To Raise More Cash For Growth?

There's no doubt Radio Fuels Energy's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further 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 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).

Radio Fuels Energy has a market capitalisation of CA$28m and burnt through CA$280k last year, which is 1.0% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Radio Fuels Energy's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Radio Fuels Energy is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn reduction was very encouraging. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Radio Fuels Energy (of which 2 don't sit too well with us!) you should know about.

Of course Radio Fuels Energy 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.