We Think AFC Energy (LON:AFC) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, AFC Energy (LON:AFC) shareholders have done very well over the last year, with the share price soaring by 211%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given its strong share price performance, we think it's worthwhile for AFC Energy shareholders to consider whether its cash burn is concerning. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for AFC Energy

When Might AFC Energy Run Out Of Money?

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. When AFC Energy last reported its balance sheet in April 2021, it had zero debt and cash worth UK£61m. In the last year, its cash burn was UK£7.4m. Therefore, from April 2021 it had 8.2 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Is AFC Energy's Cash Burn Changing Over Time?

Although AFC Energy had revenue of UK£149k in the last twelve months, its operating revenue was only UK£149k in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. The skyrocketing cash burn up 103% year on year certainly tests our nerves. With spending growing that quickly, shareholders will be hoping that the money is prudently spent. 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 Easily Can AFC Energy Raise Cash?

While AFC Energy does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 UK£433m, AFC Energy's UK£7.4m in cash burn equates to about 1.7% of its 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.

So, Should We Worry About AFC Energy's Cash Burn?

As you can probably tell by now, we're not too worried about AFC Energy's cash burn. For example, we think its cash runway 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. 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. On another note, AFC Energy has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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