Here's Why We're Not Too Worried About Foresight Autonomous Holdings' (TLV:FRSX) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. By way of example, Foresight Autonomous Holdings (TLV:FRSX) has seen its share price rise 651% over the last year, delighting many shareholders. 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.

In light of its strong share price run, we think now is a good time to investigate how risky Foresight Autonomous Holdings' cash burn is. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Foresight Autonomous Holdings

When Might Foresight Autonomous Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2020, Foresight Autonomous Holdings had US$15m in cash, and was debt-free. Looking at the last year, the company burnt through US$12m. Therefore, from September 2020 it had roughly 15 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

How Is Foresight Autonomous Holdings' Cash Burn Changing Over Time?

Foresight Autonomous Holdings didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With cash burn dropping by 4.4% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Foresight Autonomous Holdings Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Foresight Autonomous Holdings to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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 US$547m, Foresight Autonomous Holdings' US$12m in cash burn equates to about 2.1% of its 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 Foresight Autonomous Holdings' Cash Burn A Worry?

The good news is that in our view Foresight Autonomous Holdings' cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash runway, while on the other it can also boast very strong cash burn relative to its market cap. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Foresight Autonomous Holdings' situation. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Foresight Autonomous Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course Foresight Autonomous Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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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