Just because a business isn’t making any money doesn’t mean the stock will go down. For example, even though software-as-a-service business Salesforce.com has been losing money for years while growing recurring revenue, if you’ve held the stock since 2005, you’ll have done very well indeed. Regardless, only a fool would ignore the risk of a losing company burning through its cash too quickly.
It should AFC energy (LON: AFC) shareholders worried about its cash burns? In this report, we’ll look at the company’s annual negative free cash flow, henceforth referred to as cash burn. The first step is to compare cash burn with cash reserves to give us its “cash runway.”
Check out our latest analysis on AFC Energy
How long is AFC Energy’s cash flow?
Cash is defined as the time it will take for a company to run out of cash if it continues to spend at its current cash burn rate. When AFC Energy last reported its balance sheet in April 2022, it had zero debt and £49m of cash. In the last year, the money burned amounted to £13 million. That means it had a cash run of about 3.8 years as of April 2022. There’s no doubt that’s a comfortingly long run. You can see how his cash balance has changed over time in the image below.
How has AFC Energy’s cash burn changed over time?
In the last year, AFC Energy reported revenues of £719,000, but operating income was less, just £719,000. We don’t think that’s enough operating income to tell too much from the revenue growth rate as the company is growing from a low base. So today we’re going to focus on burning money. Skyrocketing cash burn 100% per year is certainly a test for our nerves. This kind of weakness in the rate of spending growth can’t last very long before causing a balance sheet, broadly speaking. While the past is always worth studying, the future is most important. For this reason, it makes a lot of sense to look our analysts’ forecasts for the company.
How easily can AFC Energy raise money?
Although AFC Energy has solid cash, the cash-burn trajectory may have some shareholders thinking ahead to when the company might need to raise more cash. Companies can raise capital through debt or equity. Typically, a business will sell new shares on its own to raise cash and drive growth. We can compare a company’s cash holdings to its market capitalization to get an idea of how many new shares a company needs to issue to finance its one-year operations.
AFC Energy has a market capitalization of £168m and burned £13m last year, which is 7.6% of the company’s market value. This is a low stake, so we think the company will be able to raise more cash to fund growth, with some dilution, or even just borrow some money.
So should we be worried about AFC Energy’s cash burns?
As you can probably tell by now, we’re not too worried about AFC Energy’s cash burns. Specifically, we think its cash flow stands out as evidence that the company is on top of its spending. While we have to admit that increasing cash burn is a bit worrisome, the other factors mentioned in this article provide great comfort when it comes to cash burn. After considering the various metrics mentioned in this report, we are quite happy with how the company is spending its money as it seems to be on track to meet its medium-term needs. Diving deeper, we noticed 4 Warning Signs of AFC Energy you need to be aware and 2 of them are a bit worrying.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.