We're Hopeful That Clover Health Investments (NASDAQ:CLOV) Will Use Its Cash Wisely

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 Clover Health Investments (NASDAQ:CLOV) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Clover Health Investments

SWOT Analysis for Clover Health Investments

When Might Clover Health Investments Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2023, Clover Health Investments had US$417m in cash, and was debt-free. In the last year, its cash burn was US$72m. So it had a cash runway of about 5.8 years from March 2023. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

How Well Is Clover Health Investments Growing?

Clover Health Investments managed to reduce its cash burn by 71% over the last twelve months, which suggests it's on the right flight path. This reduction was no doubt supported by its strong revenue growth of 55% in the same period. Considering these factors, we're fairly impressed by its growth trajectory. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Clover Health Investments Raise More Cash Easily?

There's no doubt Clover Health Investments 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. 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.

Since it has a market capitalisation of US$375m, Clover Health Investments' US$72m in cash burn equates to about 19% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Clover Health Investments' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Clover Health Investments' cash burn. For example, we think its revenue growth suggests that the company is on a good path. Its weak point is its cash burn relative to its market cap, but even that wasn't too bad! 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. An in-depth examination of risks revealed 3 warning signs for Clover Health Investments that readers should think about before committing capital to this stock.

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 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.