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Cloudflare (NYSE:NET) Is In A Strong Position To Grow Its Business

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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.

So, the natural question for Cloudflare (NYSE:NET) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Cloudflare

How Long Is Cloudflare's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Cloudflare last reported its balance sheet in March 2020, it had zero debt and cash worth US$592m. Importantly, its cash burn was US$105m over the trailing twelve months. That means it had a cash runway of about 5.7 years as of March 2020. Importantly, though, analysts think that Cloudflare will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

NYSE:NET Debt to Equity History July 9th 2020
NYSE:NET Debt to Equity History July 9th 2020

How Well Is Cloudflare Growing?

At first glance it's a bit worrying to see that Cloudflare actually boosted its cash burn by 12%, year on year. The good news is that operating revenue increased by 49% in the last year, indicating that the business is gaining some traction. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Cloudflare To Raise More Cash For Growth?

There's no doubt Cloudflare seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

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Cloudflare's cash burn of US$105m is about 0.9% of its US$12b market capitalisation. 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.

So, Should We Worry About Cloudflare's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Cloudflare is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. One real positive is that analysts are forecasting that the company will reach breakeven. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Cloudflare that investors should know when investing in the stock.

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)

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.