Yahoo Finance Here's Why We're Watching Flexiroam's (ASX:FRX) Cash Burn Situation
There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Flexiroam (ASX:FRX) stock is up 117% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given its strong share price performance, we think it's worthwhile for Flexiroam shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Flexiroam
When Might Flexiroam Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Flexiroam last reported its balance sheet in September 2021, it had zero debt and cash worth AU$1.5m. In the last year, its cash burn was AU$1.3m. Therefore, from September 2021 it had roughly 14 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Well Is Flexiroam Growing?
At first glance it's a bit worrying to see that Flexiroam actually boosted its cash burn by 12%, year on year. And we must say we find it concerning that operating revenue dropped 38% over the same period. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how Flexiroam has developed its business over time by checking this visualization of its revenue and earnings history.
Can Flexiroam Raise More Cash Easily?
Since Flexiroam can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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 AU$28m, Flexiroam's AU$1.3m in cash burn equates to about 4.7% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Flexiroam's Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Flexiroam's cash burn relative to its market cap was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, Flexiroam has 5 warning signs (and 1 which is significant) we think you should know about.
Of course Flexiroam 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. 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.
