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.
Given this risk, we thought we’d take a look at whether Snowflake (NYSE:SNOW) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’ cash, relative to its cash burn.
View our latest analysis for Snowflake
When Might Snowflake 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. As at October 2020, Snowflake had cash of US$4.8b and no debt. Looking at the last year, the company burnt through US$147m. So it had a very long cash runway of many years from October 2020. Notably, however, analysts think that Snowflake 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 Well Is Snowflake Growing?
It was fairly positive to see that Snowflake reduced its cash burn by 21% during the last year. Having said that, the revenue growth of 85% was considerably more inspiring. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Snowflake Raise Cash?
We are certainly impressed with the progress Snowflake has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund 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. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Snowflake has a market capitalisation of US$87b and burnt through US$147m last year, which is 0.2% of the company’s 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 Snowflake’s Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about Snowflake’s cash burn. For example, we think its revenue growth suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. There’s no doubt that shareholders can take a lot of heart from the fact that analysts are 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. Taking a deeper dive, we’ve spotted 3 warning signs for Snowflake you should be aware of, and 1 of them is concerning.
Of course Snowflake 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. 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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