Here's Why We're Not Too Worried About Foxtron Vehicle Technologies' (TWSE:2258) Cash Burn Situation

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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Foxtron Vehicle Technologies (TWSE:2258) shareholders should be worried about its 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Foxtron Vehicle Technologies

When Might Foxtron Vehicle Technologies Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at March 2024, Foxtron Vehicle Technologies had cash of NT$7.9b and no debt. In the last year, its cash burn was NT$3.1b. That means it had a cash runway of about 2.5 years as of March 2024. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Well Is Foxtron Vehicle Technologies Growing?

Foxtron Vehicle Technologies actually ramped up its cash burn by a whopping 96% in the last year, which shows it is boosting investment in the business. But shareholders are no doubt taking some confidence from the rockstar revenue growth of 462% during that same year. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Foxtron Vehicle Technologies is building its business over time.

How Easily Can Foxtron Vehicle Technologies Raise Cash?

There's no doubt Foxtron Vehicle Technologies seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. 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 NT$76b, Foxtron Vehicle Technologies' NT$3.1b in cash burn equates to about 4.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Foxtron Vehicle Technologies' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Foxtron Vehicle Technologies is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking an in-depth view of risks, we've identified 1 warning sign for Foxtron Vehicle Technologies that you should be aware of before investing.

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.