Here's Why We're Watching FluoGuide's (STO:FLUO) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for FluoGuide (STO:FLUO) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for FluoGuide

When Might FluoGuide 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. When FluoGuide last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth kr.20m. Importantly, its cash burn was kr.34m over the trailing twelve months. Therefore, from September 2024 it had roughly 7 months of cash runway. Importantly, the one analyst we see covering the stock thinks that FluoGuide will reach cashflow breakeven in around 23 months. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Is FluoGuide's Cash Burn Changing Over Time?

While FluoGuide did record statutory revenue of kr.1.2m over the last year, it didn't have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Over the last year its cash burn actually increased by 3.8%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can FluoGuide Raise More Cash Easily?

While its cash burn is only increasing slightly, FluoGuide shareholders should still consider the potential need for further cash, down the track. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 kr.443m, FluoGuide's kr.34m in cash burn equates to about 7.6% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is FluoGuide's Cash Burn A Worry?

On this analysis of FluoGuide's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, FluoGuide has 4 warning signs (and 2 which are potentially serious) we think you should know about.

Of course FluoGuide 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 with high insider ownership.

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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.