Here's Why We're A Bit Worried About FTC Solar's (NASDAQ:FTCI) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should FTC Solar (NASDAQ:FTCI) 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 FTC Solar
How Long Is FTC Solar's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2023, FTC Solar had US$32m in cash, and was debt-free. Importantly, its cash burn was US$52m over the trailing twelve months. That means it had a cash runway of around 7 months as of September 2023. Notably, analysts forecast that FTC Solar will break even (at a free cash flow level) in about 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.
How Well Is FTC Solar Growing?
It was fairly positive to see that FTC Solar reduced its cash burn by 42% during the last year. Unfortunately, however, operating revenue declined by 35% during the period. In light of the data above, we're fairly sanguine about the business growth trajectory. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For FTC Solar To Raise More Cash For Growth?
Since FTC Solar revenue has been falling, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
FTC Solar's cash burn of US$52m is about 80% of its US$66m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
Is FTC Solar's Cash Burn A Worry?
On this analysis of FTC Solar's cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Separately, we looked at different risks affecting the company and spotted 4 warning signs for FTC Solar (of which 1 shouldn't be ignored!) you should know about.
Of course FTC Solar may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.
