We're Hopeful That Research Frontiers (NASDAQ:REFR) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Research Frontiers (NASDAQ:REFR) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Research Frontiers

Does Research Frontiers Have A Long Cash Runway?

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. As at September 2020, Research Frontiers had cash of US$5.4m and no debt. Importantly, its cash burn was US$2.1m over the trailing twelve months. Therefore, from September 2020 it had 2.6 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Well Is Research Frontiers Growing?

Research Frontiers reduced its cash burn by 4.2% during the last year, which points to some degree of discipline. But the revenue dip of 31% in the same period was a bit concerning. Considering both these metrics, we're a little concerned about how the company is developing. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Research Frontiers is building its business over time.

Can Research Frontiers Raise More Cash Easily?

While Research Frontiers seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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$135m, Research Frontiers' US$2.1m in cash burn equates to about 1.5% 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.

How Risky Is Research Frontiers' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Research Frontiers' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although its falling revenue 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 2 warning signs for Research Frontiers that you should be aware of before investing.

Of course Research Frontiers 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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