We're Hopeful That Gapwaves (STO:GAPW B) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Gapwaves (STO:GAPW B) has seen its share price rise 117% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Gapwaves' cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Gapwaves

When Might Gapwaves Run Out Of Money?

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. In December 2020, Gapwaves had kr78m in cash, and was debt-free. In the last year, its cash burn was kr38m. Therefore, from December 2020 it had 2.0 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Well Is Gapwaves Growing?

Some investors might find it troubling that Gapwaves is actually increasing its cash burn, which is up 18% in the last year. To be fair, given that fact it's hardly inspiring to see that the operating revenue was flat year on year. In light of the data above, we're fairly sanguine about the business growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Gapwaves has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Gapwaves To Raise More Cash For Growth?

Gapwaves seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Companies can raise capital through either debt or equity. 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.

Gapwaves has a market capitalisation of kr1.5b and burnt through kr38m last year, which is 2.5% of the company's 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 Gapwaves' Cash Burn Situation?

On this analysis of Gapwaves' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn 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 Gapwaves (of which 1 is a bit concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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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