Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Frequency Electronics (NASDAQ:FEIM) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Frequency Electronics Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In October 2019, Frequency Electronics had US$11m in cash, and was debt-free. Importantly, its cash burn was US$1.5m over the trailing twelve months. So it had a cash runway of about 7.2 years from October 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Well Is Frequency Electronics Growing?
Some investors might find it troubling that Frequency Electronics is actually increasing its cash burn, which is up 20% in the last year. The revenue growth of 16% gives a ray of hope, at the very least. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Frequency Electronics is building its business over time.
Can Frequency Electronics Raise More Cash Easily?
We are certainly impressed with the progress Frequency Electronics 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. Many companies end up issuing new shares to fund future 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.
Frequency Electronics has a market capitalisation of US$84m and burnt through US$1.5m last year, which is 1.8% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Frequency Electronics's Cash Burn?
As you can probably tell by now, we're not too worried about Frequency Electronics's cash burn. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Frequency Electronics insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.