We can easily understand why investors are attracted to unprofitable companies. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. But while the success stories are well known, investors shouldn’t ignore the many, many unprofitable companies that simply burn all their money and crash.
So the natural question for Frontier Energy (ASX:FHE) shareholders is whether they should be concerned about its cash burn rate. In this report, we will consider the company’s negative annual free cash flow, which we will now refer to as “cash burn”. Let’s start with a review of the company’s cash flow, relative to its cash burn.
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How long is Frontier Energy’s cash trail?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. As of June 2022, Frontier Energy had cash of A$9.3 million and no debt. Importantly, its cash burn was A$4.6 million over the last twelve months. So there was a cash trail of about 2.0 years from June 2022. Arguably, that’s a conservative and reasonable length of trail to have. The image below shows how his cash balance has changed over the past few years.
How is Frontier Energy’s cash burn changing over time?
Although Frontier Energy has had a turnover of A$13,000 in the last twelve months, its Operating revenues were only A$1.4,000 during this period. 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. With a cash burn rate up 43% over the past year, it looks like the company is increasing its investment in the business over time. However, the company’s true cash trail will therefore be shorter than suggested above, if expenses continue to rise. Admittedly, we are a bit cautious of Frontier Energy due to its lack of meaningful operating revenue. We prefer most stocks on this list of stocks that analysts expect to see growth.
Can Frontier Energy raise more money easily?
Although Frontier Energy has a strong cash trail, its cash burn trajectory may cause some shareholders to think ahead to when the company might need to raise more cash. Companies can raise capital either through debt or equity. Typically, a company will sell new stock on its own to raise cash and drive 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 A$115 million, Frontier Energy’s cash burn of A$4.6 million equates to approximately 4.0% 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.
So should we be worried about Frontier Energy’s cash burn?
On this analysis of Frontier Energy’s cash burn, we think its cash burn relative to its market capitalization was reassuring, while its growing cash burn worries us a bit. Given all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we think shareholders should keep an eye on how it’s doing. On another note, Frontier Energy has 3 warning signs (and 2 that shouldn’t be ignored) that we think you should know about.
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.
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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.
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