Here's Why We're Not At All Concerned With Futura Medical's (LON:FUM) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Futura Medical (LON:FUM) shareholders should be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Futura Medical

How Long Is Futura Medical's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2023, Futura Medical had UK£7.8m in cash, and was debt-free. In the last year, its cash burn was UK£3.4m. Therefore, from June 2023 it had 2.3 years of cash runway. Notably, analysts forecast that Futura Medical will break even (at a free cash flow level) in about 2 years. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. Depicted below, you can see how its cash holdings have changed over time.

How Is Futura Medical's Cash Burn Changing Over Time?

In the last year, Futura Medical did book revenue of UK£1.7m, but its revenue from operations was less, at just UK£1.7m. 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. Even though it doesn't get us excited, the 45% reduction in cash burn year on year does suggest the company can continue operating for quite some time. 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.

Can Futura Medical Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Futura Medical to raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Futura Medical has a market capitalisation of UK£87m and burnt through UK£3.4m last year, which is 3.9% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Futura Medical's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Futura Medical'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 its cash burn reduction was very encouraging. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Taking an in-depth view of risks, we've identified 4 warning signs for Futura Medical that you should be aware of before investing.

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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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.