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There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Fenix Resources (ASX:FEX) stock is up 175% in the last year, providing strong gains for shareholders. 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 its strong share price performance, we think it's worthwhile for Fenix Resources shareholders to consider whether its cash burn is concerning. 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.
View our latest analysis for Fenix Resources
How Long Is Fenix Resources' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Fenix Resources last reported its balance sheet in December 2019, it had zero debt and cash worth AU$2.2m. Looking at the last year, the company burnt through AU$3.2m. That means it had a cash runway of around 8 months as of December 2019. Importantly, the one analyst we see covering the stock thinks that Fenix Resources will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Fenix Resources' Cash Burn Changing Over Time?
Fenix Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 36% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Fenix Resources Raise Cash?
Given its cash burn trajectory, Fenix Resources shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.