Companies Like Credo Technology Group Holding (NASDAQ:CRDO) Can Afford To Invest In 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. 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.

Given this risk, we thought we'd take a look at whether Credo Technology Group Holding (NASDAQ:CRDO) shareholders should 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.

Check out our latest analysis for Credo Technology Group Holding

Does Credo Technology Group Holding Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In April 2023, Credo Technology Group Holding had US$218m in cash, and was debt-free. In the last year, its cash burn was US$46m. So it had a cash runway of about 4.7 years from April 2023. Importantly, though, analysts think that Credo Technology Group Holding will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

How Well Is Credo Technology Group Holding Growing?

On balance, we think it's mildly positive that Credo Technology Group Holding trimmed its cash burn by 4.4% over the last twelve months. Having said that, the revenue growth of 73% was considerably more inspiring. 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.

How Easily Can Credo Technology Group Holding Raise Cash?

We are certainly impressed with the progress Credo Technology Group Holding has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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).

Credo Technology Group Holding's cash burn of US$46m is about 2.2% of its US$2.1b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Credo Technology Group Holding's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Credo Technology Group Holding is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. One real positive is that analysts are forecasting that the company will reach breakeven. 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 3 warning signs for Credo Technology Group Holding that potential shareholders should take into account before putting money into a stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.