We're Hopeful That WANdisco (LON:WAND) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. By way of example, WANdisco (LON:WAND) has seen its share price rise 192% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for WANdisco shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for WANdisco

When Might WANdisco Run Out Of Money?

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 June 2022, WANdisco had US$33m in cash, and was debt-free. Looking at the last year, the company burnt through US$33m. That means it had a cash runway of around 12 months as of June 2022. Notably, analysts forecast that WANdisco will break even (at a free cash flow level) in about 22 months. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Well Is WANdisco Growing?

At first glance it's a bit worrying to see that WANdisco actually boosted its cash burn by 27%, year on year. And we must say we find it concerning that operating revenue dropped 4.7% over the same period. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can WANdisco Raise More Cash Easily?

Since WANdisco can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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 US$793m, WANdisco's US$33m in cash burn equates to about 4.2% of its market value. 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.

Is WANdisco's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about WANdisco's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. One real positive is that analysts are forecasting that the company will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for WANdisco that potential shareholders should take into account before putting money into a stock.

Of course WANdisco 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. 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.