We're Interested To See How REE Automotive (NASDAQ:REE) Uses Its Cash Hoard To Grow

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for REE Automotive (NASDAQ:REE) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for REE Automotive

How Long Is REE Automotive's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2021, REE Automotive had cash of US$294m and no debt. Looking at the last year, the company burnt through US$48m. So it had a cash runway of about 6.2 years from September 2021. Importantly, though, analysts think that REE Automotive will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. You can see how its cash balance has changed over time in the image below.

How Is REE Automotive's Cash Burn Changing Over Time?

In our view, REE Automotive doesn't yet produce significant amounts of operating revenue, since it reported just US$58k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Remarkably, it actually increased its cash burn by 298% in the last year. That kind of sharp increase in spending may pay off, but is generally considered quite risky. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can REE Automotive Raise Cash?

Given its cash burn trajectory, REE Automotive shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

REE Automotive's cash burn of US$48m is about 2.6% of its US$1.8b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is REE Automotive's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way REE Automotive is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Separately, we looked at different risks affecting the company and spotted 3 warning signs for REE Automotive (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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.