We're Not Very Worried About Sociedad Hipodromo Chile's (SNSE:HIPODROMOA) Cash Burn Rate

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. 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 Sociedad Hipodromo Chile (SNSE:HIPODROMOA) shareholders should 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). 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 Sociedad Hipodromo Chile

Does Sociedad Hipodromo Chile Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. Sociedad Hipodromo Chile has such a small amount of debt that we'll set it aside, and focus on the CL$1.2b in cash it held at September 2020. In the last year, its cash burn was CL$639m. So it had a cash runway of approximately 23 months from September 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

Is Sociedad Hipodromo Chile's Revenue Growing?

Given that Sociedad Hipodromo Chile actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Unfortunately, the last year has been a disappointment, with operating revenue dropping 45% during the period. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Sociedad Hipodromo Chile is building its business over time.

How Easily Can Sociedad Hipodromo Chile Raise Cash?

Given its problematic fall in revenue, Sociedad Hipodromo Chile shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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).

Since it has a market capitalisation of CL$30b, Sociedad Hipodromo Chile's CL$639m in cash burn equates to about 2.1% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is Sociedad Hipodromo Chile's Cash Burn Situation?

On this analysis of Sociedad Hipodromo Chile's cash burn, we think its cash burn relative to its market cap was reassuring, while its falling revenue has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 2 warning signs for Sociedad Hipodromo Chile (1 is a bit unpleasant!) that you should be aware of before investing here.

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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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