Companies Like Founders First (ASX:FFL) Are In A Position To Invest In Growth
Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Founders First (ASX:FFL) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Founders First
Does Founders First Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, Founders First had AU$22m in cash, and was debt-free. Importantly, its cash burn was AU$6.5m over the trailing twelve months. That means it had a cash runway of about 3.4 years as of December 2019. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Well Is Founders First Growing?
Notably, Founders First actually ramped up its cash burn very hard and fast in the last year, by 172%, signifying heavy investment in the business. While that certainly give us pause, we take a lot of comfort in the strong annual revenue growth of 72%. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. You can take a look at how Founders First is growing revenue over time by checking this visualization of past revenue growth.
Can Founders First Raise More Cash Easily?
We are certainly impressed with the progress Founders First has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Since it has a market capitalisation of AU$35m, Founders First's AU$6.5m in cash burn equates to about 19% of its market value. 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.
So, Should We Worry About Founders First's Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Founders First's revenue growth was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Founders First's situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 5 warning signs for Founders First that investors should know when investing in the stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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