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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Firstwave Cloud Technology (ASX:FCT) shareholders be worried about its cash burn? For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Firstwave Cloud Technology
How Long Is Firstwave Cloud Technology’s 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 June 2020, Firstwave Cloud Technology had cash of AU$15m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$12m. So it had a cash runway of approximately 15 months from June 2020. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Firstwave Cloud Technology Growing?
At first glance it’s a bit worrying to see that Firstwave Cloud Technology actually boosted its cash burn by 39%, year on year. Also concerning, operating revenue was actually down by 6.6% in that time. 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. You can take a look at how Firstwave Cloud Technology has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Firstwave Cloud Technology To Raise More Cash For Growth?
Since Firstwave Cloud Technology can’t yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. 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 comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Firstwave Cloud Technology’s cash burn of AU$12m is about 14% of its AU$90m 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 Firstwave Cloud Technology’s Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Firstwave Cloud Technology’s cash burn relative to its market cap was relatively promising. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Firstwave Cloud Technology has 4 warning signs (and 2 which are a bit concerning) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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. 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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