Here's Why We're Not At All Concerned With Dada Nexus' (NASDAQ:DADA) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Dada Nexus (NASDAQ:DADA) 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Dada Nexus

How Long Is Dada Nexus' 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. When Dada Nexus last reported its balance sheet in June 2023, it had zero debt and cash worth CN¥3.6b. In the last year, its cash burn was CN¥949m. Therefore, from June 2023 it had 3.7 years of cash runway. Notably, however, analysts think that Dada Nexus will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Dada Nexus Growing?

We reckon the fact that Dada Nexus managed to shrink its cash burn by 48% over the last year is rather encouraging. And considering that its operating revenue gained 30% during that period, that's great to see. It seems to be growing nicely. 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 Dada Nexus Raise More Cash Easily?

There's no doubt Dada Nexus seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. 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).

Dada Nexus' cash burn of CN¥949m is about 10% of its CN¥9.4b market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Dada Nexus' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Dada Nexus 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. Its cash burn relative to its market cap wasn't quite as good, but was still rather encouraging! It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Dada Nexus that potential shareholders should take into account before putting money into a stock.

Of course Dada Nexus 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.