We're Hopeful That Formycon (ETR:FYB) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Formycon (ETR:FYB) 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.

View our latest analysis for Formycon

Does Formycon Have A Long Cash Runway?

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. Looking at the last year, the company burnt through €15m. That means it had a cash runway of around 20 months as of December 2021. Notably, analysts forecast that Formycon will break even (at a free cash flow level) in about 21 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. The image below shows how its cash balance has been changing over the last few years.

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. Considering both these metrics, we're a little concerned about how the company is developing. 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?

Given the trajectory of Formycon's cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 has a market capitalisation of €830m and burnt through €15m last year, which is 1.9% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Formycon's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Formycon's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. 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 Formycon's CEO gets paid each year.

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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.