Here's Why We're Not Too Worried About Westwing Comércio Varejista's (BVMF:WEST3) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Westwing Comércio Varejista (BVMF:WEST3) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Westwing Comércio Varejista

Does Westwing Comércio Varejista Have A Long Cash Runway?

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. In December 2023, Westwing Comércio Varejista had R$139m in cash, and was debt-free. Importantly, its cash burn was R$5.3m over the trailing twelve months. That means it had a cash runway of very many years as of December 2023. 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.

How Well Is Westwing Comércio Varejista Growing?

Given our focus on Westwing Comércio Varejista's cash burn, we're delighted to see that it reduced its cash burn by a nifty 94%. But it was a bit disconcerting to see operating revenue down 23% in that time. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Westwing Comércio Varejista is building its business over time.

How Hard Would It Be For Westwing Comércio Varejista To Raise More Cash For Growth?

While Westwing Comércio Varejista 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Westwing Comércio Varejista's cash burn of R$5.3m is about 4.1% of its R$130m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Westwing Comércio Varejista's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Westwing Comércio Varejista is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Westwing Comércio Varejista (of which 1 is concerning!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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

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.