We Think Formycon (ETR:FYB) Can Easily Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Formycon (ETR:FYB) shareholders is whether they should be concerned by its rate of 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Formycon

How Long Is Formycon's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In June 2021, Formycon had €34m in cash, and was debt-free. Looking at the last year, the company burnt through €12m. Therefore, from June 2021 it had 2.8 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

Is Formycon's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Formycon actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. While it's not that amazing, we still think that the 17% increase in revenue from operations was a positive. 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 Easily Can Formycon Raise Cash?

Notwithstanding Formycon's revenue growth, it is still important to consider how it could raise more money, if it needs to. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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 €12m is about 2.2% of its €559m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Formycon's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Formycon's cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even though its revenue growth wasn't quite as impressive, it was still a positive. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs 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.
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