Companies Like FunPep (TSE:4881) Are In A Position To Invest In Growth

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. 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 this risk, we thought we'd take a look at whether FunPep (TSE:4881) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for FunPep

When Might FunPep 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. In June 2024, FunPep had JP¥2.0b in cash, and was debt-free. Importantly, its cash burn was JP¥540m over the trailing twelve months. So it had a cash runway of about 3.6 years from June 2024. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Is FunPep's Cash Burn Changing Over Time?

Because FunPep isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Even though it doesn't get us excited, the 47% reduction in cash burn year on year does suggest the company can continue operating for quite some time. FunPep makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can FunPep Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for FunPep to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

FunPep's cash burn of JP¥540m is about 12% of its JP¥4.6b market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is FunPep's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way FunPep is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its cash burn relative to its market cap wasn't quite as good, but was still rather encouraging! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking a deeper dive, we've spotted 6 warning signs for FunPep you should be aware of, and 3 of them are a bit unpleasant.

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

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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.