We can readily understand why investors are attracted to unprofitable companies. By way of example, Founders Metals (CVE:FDR) has seen its share price rise 265% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So notwithstanding the buoyant share price, we think it’s well worth asking whether Founders Metals’ cash burn is too risky. 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
View our latest analysis for Founders Metals
Does Founders Metals Have A Long 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 May 2024, Founders Metals had cash of CA$10m and no debt. In the last year, its cash burn was CA$12m. So it had a cash runway of approximately 11 months from May 2024. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Is Founders Metals’ Cash Burn Changing Over Time?
Founders Metals didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Its cash burn positively exploded in the last year, up 369%. Given that sharp increase in spending, the company’s cash runway will shrink rapidly as it depletes its cash reserves. Admittedly, we’re a bit cautious of Founders Metals due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Founders Metals Raise Cash?
Since its cash burn is moving in the wrong direction, Founders Metals shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Founders Metals has a market capitalisation of CA$199m and burnt through CA$12m last year, which is 5.9% of the company’s market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Founders Metals’ Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Founders Metals’ 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. Its important for readers to be cognizant of the risks that can affect the company’s operations, and we’ve picked out 4 warning signs for Founders Metals that investors should know when investing in the stock.
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.
