We're Hopeful That Franklin Wireless (NASDAQ:FKWL) Will Use Its Cash Wisely
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?
Given this risk, we thought we'd take a look at whether Franklin Wireless (NASDAQ:FKWL) 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. Let's start with an examination of the business' cash, relative to its cash burn.
See our latest analysis for Franklin Wireless
Does Franklin Wireless 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 March 2023, Franklin Wireless had US$34m in cash, and was debt-free. Importantly, its cash burn was US$9.0m over the trailing twelve months. So it had a cash runway of about 3.8 years from March 2023. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
How Well Is Franklin Wireless Growing?
We reckon the fact that Franklin Wireless managed to shrink its cash burn by 45% over the last year is rather encouraging. Having said that, the revenue growth of 80% was considerably more inspiring. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Franklin Wireless is growing revenue over time by checking this visualization of past revenue growth.
How Easily Can Franklin Wireless Raise Cash?
While Franklin Wireless seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Franklin Wireless has a market capitalisation of US$44m and burnt through US$9.0m last year, which is 20% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
So, Should We Worry About Franklin Wireless' Cash Burn?
As you can probably tell by now, we're not too worried about Franklin Wireless' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although its cash burn relative to its market cap does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking an in-depth view of risks, we've identified 1 warning sign for Franklin Wireless that you should be aware of before investing.
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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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.
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