Yahoo Finance Here's Why We're Not Too Worried About Fluence's (ASX:FLC) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Fluence (ASX:FLC) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Fluence
How Long Is Fluence's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2020, Fluence had cash of US$20m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$21m over the trailing twelve months. That means it had a cash runway of around 12 months as of June 2020. Importantly, the one analyst we see covering the stock thinks that Fluence will reach cashflow breakeven in around 16 months. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. The image below shows how its cash balance has been changing over the last few years.
How Well Is Fluence Growing?
Happily, Fluence is travelling in the right direction when it comes to its cash burn, which is down 56% over the last year. And while hardly exciting, it was still good to see revenue growth of 2.9% during that time. On balance, we'd say the company is improving over time. 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 Fluence Raise More Cash Easily?
Fluence seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Fluence's cash burn of US$21m is about 19% of its US$111m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Fluence's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Fluence is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. While its cash runway wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Fluence that investors should know when investing in the stock.
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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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