Yahoo Finance We're Hopeful That Fluence (ASX:FLC) Will Use Its Cash Wisely
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Fluence (ASX:FLC) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
See our latest analysis for Fluence
Does Fluence Have A Long Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. Fluence has such a small amount of debt that we'll set it aside, and focus on the US$20m in cash it held at June 2020. In the last year, its cash burn was US$21m. So it had a cash runway of approximately 12 months from June 2020. Notably, however, the one analyst we see covering the stock thinks that Fluence will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Fluence Growing?
Fluence managed to reduce its cash burn by 56% over the last twelve months, which suggests it's on the right flight path. 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. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Fluence Raise Cash?
Even though it seems like Fluence is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 has a market capitalisation of US$91m and burnt through US$21m last year, which is 23% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
So, Should We Worry About Fluence's Cash Burn?
As you can probably tell by now, we're not too worried about Fluence's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. While its cash burn relative to its market cap wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking an in-depth view of risks, we've identified 4 warning signs for Fluence 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)
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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