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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Fission Uranium (TSE:FCU) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Fission Uranium Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2019, Fission Uranium had cash of CA$8.7m and no debt. Importantly, its cash burn was CA$20m over the trailing twelve months. So it had a cash runway of approximately 5 months from June 2019. That’s a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. You can see how its cash balance has changed over time in the image below.
How Is Fission Uranium’s Cash Burn Changing Over Time?
Because Fission Uranium isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 8.4%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Fission Uranium To Raise More Cash For Growth?
While it’s cash burn is only increasing slightly, Fission Uranium shareholders should still consider the potential need for further cash, down the track. 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 CA$192m, Fission Uranium’s CA$20m in cash burn equates to about 11% of its market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but there’s a good chance shareholders would be somewhat diluted.
Is Fission Uranium’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Fission Uranium’s cash burn relative to its market cap was truly promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we’d be watching like a hawk for any deterioration. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Fission Uranium’s CEO gets paid each year.If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.