Yahoo Finance We're Not Very Worried About Falcon Metals' (ASX:FAL) Cash Burn Rate
We can readily understand why investors are attracted to unprofitable companies. 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.
So should Falcon Metals (ASX:FAL) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Falcon Metals
When Might Falcon Metals Run Out Of Money?
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. When Falcon Metals last reported its balance sheet in December 2022, it had zero debt and cash worth AU$23m. Importantly, its cash burn was AU$5.7m over the trailing twelve months. So it had a cash runway of about 4.1 years from December 2022. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Easily Can Falcon Metals Raise Cash?
Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).
Falcon Metals' cash burn of AU$5.7m is about 16% of its AU$35m 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.
How Risky Is Falcon Metals' Cash Burn Situation?
Because Falcon Metals is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash runway gave us comfort. Overall, we don't think shareholders need to be worried about its cash burn in the near term. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Falcon Metals (of which 1 is a bit unpleasant!) you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.
