We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Beachbody Company (NYSE:BODY) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Beachbody Company Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Beachbody Company last reported its balance sheet in September 2021, it had zero debt and cash worth US$212m. Looking at the last year, the company burnt through US$221m. Therefore, from September 2021 it had roughly 12 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. The image below shows how its cash balance has been changing over the last few years.
Is Beachbody Company's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Beachbody Company actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Although it's hardly brilliant growth, it's good to see the company grew revenue by 9.6% in the last year. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can Beachbody Company Raise More Cash Easily?
While Beachbody Company is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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 US$876m, Beachbody Company's US$221m in cash burn equates to about 25% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Beachbody Company's Cash Burn?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Beachbody Company's revenue growth was relatively promising. Summing up, we think the Beachbody Company's cash burn is a risk, based on the factors we mentioned in this article. Taking an in-depth view of risks, we've identified 3 warning signs for Beachbody Company that you should be aware of before investing.
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)
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.
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