Just because a business does not make any money, does not mean that the stock will go down. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Fitbit (NYSE:FIT) shareholders 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’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is Fitbit’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Fitbit last reported its balance sheet in June 2019, it had zero debt and cash worth US$565m. Importantly, its cash burn was US$8.8m over the trailing twelve months. So it had a very long cash runway of many years from June 2019. Notably, however, analysts think that Fitbit 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 Fitbit Growing?
Fitbit managed to reduce its cash burn by 88% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. And it could also show revenue growth of 2.6% in the same period. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Fitbit Raise Cash?
While Fitbit seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Fitbit’s cash burn of US$8.8m is about 0.9% of its US$948m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Fitbit’s Cash Burn?
As you can probably tell by now, we’re not too worried about Fitbit’s cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. Its weak point is its revenue growth, but even that wasn’t too bad! 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. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Fitbit CEO receives in total remuneration.If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.