Will WANdisco (LON:WAND) Spend Its Cash Wisely?
There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether WANdisco (LON:WAND) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
See our latest analysis for WANdisco
How Long Is WANdisco's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2021, WANdisco had cash of US$28m and no debt. In the last year, its cash burn was US$34m. So it had a cash runway of approximately 10 months from December 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is WANdisco Growing?
Some investors might find it troubling that WANdisco is actually increasing its cash burn, which is up 40% in the last year. Also concerning, operating revenue was actually down by 31% in that time. Taken together, we think these growth metrics are a little worrying. 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.
Can WANdisco Raise More Cash Easily?
Since WANdisco can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
WANdisco's cash burn of US$34m is about 15% of its US$223m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is WANdisco's Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought WANdisco's cash burn relative to its market cap was relatively promising. Summing up, we think the WANdisco's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 3 warning signs for WANdisco you should be aware of, and 2 of them are a bit concerning.
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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.