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 Frontier Energy (ASX:FHE) shareholders should be worried about its cash burn. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Frontier Energy
When Might Frontier Energy Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Frontier Energy last reported its balance sheet in June 2022, it had zero debt and cash worth AU$9.3m. Looking at the last year, the company burnt through AU$4.6m. So it had a cash runway of about 2.0 years from June 2022. Notably, however, the one analyst we see covering the stock thinks that Frontier Energy will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.
How Is Frontier Energy's Cash Burn Changing Over Time?
In the last year, Frontier Energy did book revenue of AU$13k, but its revenue from operations was less, at just AU$1.4k. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. With the cash burn rate up 43% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Frontier Energy makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Frontier Energy To Raise More Cash For Growth?
Given its cash burn trajectory, Frontier Energy shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Frontier Energy has a market capitalisation of AU$95m and burnt through AU$4.6m last year, which is 4.9% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Frontier Energy's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Frontier Energy is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. 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. On another note, Frontier Energy has 4 warning signs (and 2 which are concerning) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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