We're Hopeful That Franklin Wireless (NASDAQ:FKWL) Will Use Its Cash Wisely

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

So should Franklin Wireless (NASDAQ:FKWL) shareholders 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Franklin Wireless

When Might Franklin Wireless Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2023, Franklin Wireless had cash of US$34m and no debt. Looking at the last year, the company burnt through US$9.0m. Therefore, from March 2023 it had 3.8 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Franklin Wireless Growing?

We reckon the fact that Franklin Wireless managed to shrink its cash burn by 45% over the last year is rather encouraging. Having said that, the revenue growth of 80% was considerably more inspiring. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Franklin Wireless is growing revenue over time by checking this visualization of past revenue growth.

Can Franklin Wireless Raise More Cash Easily?

We are certainly impressed with the progress Franklin Wireless has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Franklin Wireless has a market capitalisation of US$38m and burnt through US$9.0m last year, which is 24% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Franklin Wireless' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Franklin Wireless is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking an in-depth view of risks, we've identified 1 warning sign for Franklin Wireless 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 interesting companies, 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.