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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Fortress Technologies (CVE:FORT) shareholders should 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Fortress Technologies Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Fortress Technologies last reported its balance sheet in June 2019, it had zero debt and cash worth CA$10m. In the last year, its cash burn was CA$25k. So it had a very long cash runway of many years from June 2019. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
How Is Fortress Technologies's Cash Burn Changing Over Time?
Although Fortress Technologies had revenue of CA$1.4m in the last twelve months, its operating revenue was only CA$1.4m in that time period. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. From a cash flow perspective, it's great to see the company's cash burn dropped by 99% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Fortress Technologies is building its business over time.
How Easily Can Fortress Technologies Raise Cash?
There's no doubt Fortress Technologies's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further 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 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).
Fortress Technologies has a market capitalisation of CA$8.5m and burnt through CA$25k last year, which is 0.3% 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.
Is Fortress Technologies's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Fortress Technologies's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. 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. Notably, our data indicates that Fortress Technologies insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course Fortress Technologies 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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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. Thank you for reading.