Here's Why We're Not At All Concerned With Confluent's (NASDAQ:CFLT) Cash Burn Situation

By
Simply Wall St
Published
January 07, 2022
NasdaqGS:CFLT
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Confluent (NASDAQ:CFLT) shareholders should be worried about its cash burn. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Confluent

How Long Is Confluent's 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. When Confluent last reported its balance sheet in September 2021, it had zero debt and cash worth US$1.0b. Importantly, its cash burn was US$109m over the trailing twelve months. That means it had a cash runway of about 9.5 years as of September 2021. Importantly, though, analysts think that Confluent 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.

debt-equity-history-analysis
NasdaqGS:CFLT Debt to Equity History January 7th 2022

How Well Is Confluent Growing?

Some investors might find it troubling that Confluent is actually increasing its cash burn, which is up 31% in the last year. The good news is that operating revenue increased by 43% in the last year, indicating that the business is gaining some traction. 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. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Confluent Raise Cash?

While Confluent 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).

Confluent has a market capitalisation of US$17b and burnt through US$109m last year, which is 0.6% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Confluent's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Confluent's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Confluent (of which 1 doesn't sit too well with us!) you should know about.

Of course Confluent 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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