Here's Why We're Not Too Worried About Formycon's (ETR:FYB) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. 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. 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 Formycon (ETR:FYB) 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'.

Check out our latest analysis for Formycon

When Might Formycon Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, Formycon had €25m in cash, and was debt-free. Importantly, its cash burn was €15m over the trailing twelve months. Therefore, from December 2021 it had roughly 20 months of cash runway. Notably, however, analysts think that Formycon will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Formycon Growing?

Notably, Formycon actually ramped up its cash burn very hard and fast in the last year, by 168%, signifying heavy investment in the business. While operating revenue was up over the same period, the 8.0% gain gives us scant comfort. Taken together, we think these growth metrics are a little worrying. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Formycon To Raise More Cash For Growth?

Given the trajectory of Formycon's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Formycon's cash burn of €15m is about 1.9% of its €830m market capitalisation. 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.

How Risky Is Formycon's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Formycon is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Formycon that potential shareholders should take into account before putting money into a stock.

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)

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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.