Yahoo Finance Here's Why We're Not At All Concerned With Trustpilot Group's (LON:TRST) Cash Burn Situation
We can readily understand why investors are attracted to unprofitable companies. 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.
So, the natural question for Trustpilot Group (LON:TRST) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Trustpilot Group
How Long Is Trustpilot Group's 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 December 2021, Trustpilot Group had US$94m in cash, and was debt-free. Importantly, its cash burn was US$9.7m over the trailing twelve months. Therefore, from December 2021 it had 9.7 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
Is Trustpilot Group's Revenue Growing?
Given that Trustpilot Group actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. We think that it's fairly positive to see that revenue grew 29% in the last twelve months. 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 Trustpilot Group To Raise More Cash For Growth?
While Trustpilot Group is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster 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 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.
Since it has a market capitalisation of US$570m, Trustpilot Group's US$9.7m in cash burn equates to about 1.7% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Trustpilot Group's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Trustpilot Group's cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its revenue growth was very encouraging. 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 2 warning signs for Trustpilot Group that investors should know when investing in the stock.
Of course Trustpilot Group may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.
