There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But while history boasts of these rare successes, those who fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we would examine whether AFC Energy (LON:AFC) shareholders should be concerned about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
Discover our latest analysis for AFC Energy
How long is the AFC Energy cash trail?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of April 2022, AFC Energy had cash of £49m and no debt. Importantly, his cash burn was £13m over the last twelve months. It therefore had a cash trail of approximately 3.8 years as of April 2022. A cash trail of this length gives the business the time and space it needs to grow its business. Below you can see how its liquidity has changed over time.
How is AFC Energy’s cash burn changing over time?
In the past year, AFC Energy had a turnover of UK£719,000, but its operating income was lower at just £719,000. Given this low operating leverage, we believe it is too early to place much emphasis on revenue growth. We will therefore focus instead on the evolution of cash consumption. In fact, he has dramatically increased his spending over the past year, increasing cash burn by 100%. It’s fair to say that this type of rate of increase cannot be sustained for very long without putting pressure on the balance sheet. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
How difficult would it be for AFC Energy to raise more cash for growth?
Given its cash burn trajectory, AFC Energy shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. In general, a listed company can raise new funds by issuing shares or by going into debt. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. By looking at a company’s cash burn relative to its market cap, we get insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
With a market capitalization of £150m, AFC Energy’s cash burn of £13m is equivalent to around 8.5% of its market value. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
Is AFC Energy’s cash burn a concern?
It may already seem obvious to you that we are relatively comfortable with the way AFC Energy is burning through its cash. In particular, we think its cash trail stands out as proof that the company is on top of spending. While it must be admitted that its growing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to cash burn. After considering the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its money, as it appears to be on track to meet its medium-term needs. On a different note, we conducted a thorough investigation of the company and identified 4 warning signs for AFC Energy (3 make us uncomfortable!) that you should be aware of before investing here.
If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
Valuation is complex, but we help make it simple.
Find out if AFC Energy is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis