We Think Clover Health Investments (NASDAQ:CLOV) Can Afford To Drive Business Growth

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. Indeed, Clover Health Investments (NASDAQ:CLOV) stock is up 364% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Clover Health Investments' cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Clover Health Investments

Does Clover Health Investments Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Clover Health Investments last reported its September 2024 balance sheet in November 2024, it had zero debt and cash worth US$333m. In the last year, its cash burn was US$110m. So it had a cash runway of about 3.0 years from September 2024. Importantly, though, analysts think that Clover Health Investments will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

How Well Is Clover Health Investments Growing?

We reckon the fact that Clover Health Investments managed to shrink its cash burn by 40% over the last year is rather encouraging. And operating revenue was up by 13% too. On balance, we'd say the company is improving over time. 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.

How Hard Would It Be For Clover Health Investments To Raise More Cash For Growth?

While Clover Health Investments seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

Clover Health Investments' cash burn of US$110m is about 5.0% of its US$2.2b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Clover Health Investments' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Clover Health Investments' cash burn. For example, we think its cash runway suggests that the company is on a good path. Its revenue growth wasn't quite as good, but was still rather encouraging! Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Clover Health Investments insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

Of course Clover Health Investments 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 with high insider ownership.

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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.