We're A Little Worried About Westwing Comércio Varejista's (BVMF:WEST3) Cash Burn Rate

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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Westwing Comércio Varejista (BVMF:WEST3) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Westwing Comércio Varejista

Does Westwing Comércio Varejista Have A Long 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. Westwing Comércio Varejista has such a small amount of debt that we'll set it aside, and focus on the R$222m in cash it held at March 2022. Importantly, its cash burn was R$168m over the trailing twelve months. Therefore, from March 2022 it had roughly 16 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. The image below shows how its cash balance has been changing over the last few years.

How Well Is Westwing Comércio Varejista Growing?

It was quite stunning to see that Westwing Comércio Varejista increased its cash burn by 1,217% over the last year. That does give us pause, and we can't take much solace in the operating revenue growth of 18% in the same time frame. Considering both these metrics, we're a little concerned about how the company is developing. 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.

Can Westwing Comércio Varejista Raise More Cash Easily?

Given the trajectory of Westwing Comércio Varejista's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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. 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.

Since it has a market capitalisation of R$288m, Westwing Comércio Varejista's R$168m in cash burn equates to about 59% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

Is Westwing Comércio Varejista's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Westwing Comércio Varejista's revenue growth was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Westwing Comércio Varejista that potential shareholders should take into account before putting money into a stock.

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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.