Should You Buy Forbidden Technologies plc (LON:FBT) For This Reason?

Forbidden Technologies plc (AIM:FBT) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Looking at Forbidden Technologies’s latest financial data, I will gauge when the company may run out of cash and need to raise more money. View our latest analysis for Forbidden Technologies

What is cash burn?

Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Forbidden Technologies has UK£1.75M in cash holdings and producing negative cash flows from its day-to-day activities of -UK£1.70M. How fast Forbidden Technologies runs down its cash supply over time is known as the cash burn rate. The riskiest factor facing investors of the company is the potential for the company to run out of cash without the ability to raise more money, i.e. the company goes out of business. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and Forbidden Technologies is no exception. These businesses operate in a highly competitive environment and face running down its cash holdings too fast in order to keep up with innovation.

When will Forbidden Technologies need to raise more cash?

Opex, or operational expenses, are the necessary costs Forbidden Technologies must pay to keep the business running every day. For the purpose of this calculation I've only accounted for sales, general and admin (SG&A) expenses, and R&D expenses incurred within this year. Over the last twelve months, opex (excluding one-offs) increased by 9.27%, which is fairly normal for a small-cap. If Forbidden Technologies continues to ramp up expenditure at this rate for the upcoming year, it’ll likely need to come to market within the next few months, given the its current level of cash reserves. Moreover, even if Forbidden Technologies kept its opex level at UK£2.41M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and Forbidden Technologies still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the Forbidden Technologies’s operation is, and when things may have to change.

Next Steps:

Loss-making companies are a risky play, especially those that are still ramping up its opex. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its current opex growth rate and its level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. Keep in mind I haven't considered other factors such as how FBT is expected to perform in the future. I suggest you continue to research Forbidden Technologies to get a more holistic view of the company by looking at:

1. Historical Performance: What has FBT's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Forbidden Technologies’s board and the CEO’s back ground.
3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.