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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Sociedad Hipodromo Chile (SNSE:HIPODROMOA) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Sociedad Hipodromo Chile

How Long Is Sociedad Hipodromo Chile's 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$1.6b in cash it held at December 2020. Importantly, its cash burn was CL$821m over the trailing twelve months. That means it had a cash runway of around 23 months as of December 2020. 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. 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 39% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Sociedad Hipodromo Chile is building its business over time.

Can Sociedad Hipodromo Chile Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Sociedad Hipodromo Chile shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.

Since it has a market capitalisation of CL$29b, Sociedad Hipodromo Chile's CL$821m in cash burn equates to about 2.8% 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. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Sociedad Hipodromo Chile (of which 1 shouldn't be ignored!) you should know about.

Of course Sociedad Hipodromo Chile 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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