We're Interested To See How Nextdoor Holdings (NYSE:KIND) Uses Its Cash Hoard To Grow

By
Simply Wall St
Published
November 11, 2021
NYSE:KIND
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Nextdoor Holdings (NYSE:KIND) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Nextdoor Holdings

Does Nextdoor Holdings Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Nextdoor Holdings last reported its balance sheet in March 2021, it had zero debt and cash worth US$132m. In the last year, its cash burn was US$45m. So it had a cash runway of about 3.0 years from March 2021. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NYSE:KIND Debt to Equity History November 12th 2021

How Well Is Nextdoor Holdings Growing?

It was fairly positive to see that Nextdoor Holdings reduced its cash burn by 26% during the last year. And arguably the operating revenue growth of 62% was even more impressive. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Nextdoor Holdings is building its business over time.

Can Nextdoor Holdings Raise More Cash Easily?

There's no doubt Nextdoor Holdings 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. 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).

Nextdoor Holdings' cash burn of US$45m is about 1.0% of its US$4.7b 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.

How Risky Is Nextdoor Holdings' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Nextdoor Holdings' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. 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 1 warning sign for Nextdoor Holdings that potential shareholders should take into account before putting money into a stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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