Is Fulcrum Utility Services (LON:FCRM) In A Good Position To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Fulcrum Utility Services (LON:FCRM) shareholders 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.

Check out our latest analysis for Fulcrum Utility Services

Does Fulcrum Utility Services Have A Long 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 March 2022, Fulcrum Utility Services had UK£11m in cash, and was debt-free. Looking at the last year, the company burnt through UK£13m. That means it had a cash runway of around 10 months as of March 2022. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Fulcrum Utility Services Growing?

Some investors might find it troubling that Fulcrum Utility Services is actually increasing its cash burn, which is up 29% in the last year. The silver lining is that revenue was up 31%, showing the business is growing at the top line. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over 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.

How Easily Can Fulcrum Utility Services Raise Cash?

Even though it seems like Fulcrum Utility Services is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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. 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.

Since it has a market capitalisation of UK£23m, Fulcrum Utility Services' UK£13m in cash burn equates to about 59% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About Fulcrum Utility Services' Cash Burn?

On this analysis of Fulcrum Utility Services' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Summing up, we think the Fulcrum Utility Services' cash burn is a risk, based on the factors we mentioned in this article. On another note, Fulcrum Utility Services has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.