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Here's Why We're Not At All Concerned With FINEOS Corporation Holdings's (ASX:FCL) Cash Burn Situation

Simply Wall St

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for FINEOS Corporation Holdings (ASX:FCL) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for FINEOS Corporation Holdings

When Might FINEOS Corporation Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When FINEOS Corporation Holdings last reported its balance sheet in December 2019, it had zero debt and cash worth €35m. Importantly, its cash burn was €8.6m over the trailing twelve months. Therefore, from December 2019 it had 4.1 years of cash runway. Importantly, though, analysts think that FINEOS Corporation Holdings will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

ASX:FCL Historical Debt, March 11th 2020

How Well Is FINEOS Corporation Holdings Growing?

FINEOS Corporation Holdings boosted investment sharply in the last year, with cash burn ramping by 74%. On the bright side, at least operating revenue was up 29% over the same period, giving some cause for hope. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For FINEOS Corporation Holdings To Raise More Cash For Growth?

We are certainly impressed with the progress FINEOS Corporation Holdings 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

FINEOS Corporation Holdings has a market capitalisation of €485m and burnt through €8.6m last year, which is 1.8% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is FINEOS Corporation Holdings's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way FINEOS Corporation Holdings is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the FINEOS Corporation Holdings CEO is paid..

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.