Forum Merger II Corporation (NASDAQ:FMCI) continues its loss-making streak, announcing negative earnings for its latest financial year ending. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Forum Merger II is spending more money than it earns, it will need to fund its expenses via external sources of capital. Forum Merger II may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
With a negative free cash flow of -US$421.2k, Forum Merger II is chipping away at its US$1.8m cash reserves in order to run its business. The biggest threat facing Forum Merger II investors is the company going out of business when it runs out of money and cannot raise any more capital. Forum Merger II operates in the asset management and custody banks industry, which delivered positive earnings in the past year. This means, on average, its industry peers are profitable. Forum Merger II runs the risk of running down its cash supply too fast, or falling behind its profitable peers by investing too little.
When will Forum Merger II need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Forum Merger II has to spend each year in order to keep its business running.
Even though this is analysis is fairly basic, and Forum Merger II still can cut its overhead in the near future, or borrow money instead of raising new equity capital, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
I admit this is a fairly basic analysis for FMCI's financial health. Other important fundamentals need to be considered as well. I suggest you continue to research Forum Merger II to get a better picture of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FMCI’s future growth? Take a look at our free research report of analyst consensus for FMCI’s outlook.
- Valuation: What is FMCI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FMCI is currently mispriced by the market.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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