Here's Why We're Not Too Worried About AST SpaceMobile's (NASDAQ:ASTS) Cash Burn Situation

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should AST SpaceMobile (NASDAQ:ASTS) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for AST SpaceMobile

How Long Is AST SpaceMobile's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When AST SpaceMobile last reported its balance sheet in June 2021, it had zero debt and cash worth US$403m. Importantly, its cash burn was US$92m over the trailing twelve months. Therefore, from June 2021 it had 4.4 years of cash runway. Importantly, though, the one analyst we see covering the stock thinks that AST SpaceMobile will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is AST SpaceMobile Growing?

One thing for shareholders to keep front in mind is that AST SpaceMobile increased its cash burn by 201% in the last twelve months. Of course, the truly verdant revenue growth of 117% in that time may well justify the growth spend. In light of the data above, we're fairly sanguine about the business growth trajectory. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can AST SpaceMobile Raise More Cash Easily?

We are certainly impressed with the progress AST SpaceMobile 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. 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).

AST SpaceMobile has a market capitalisation of US$2.2b and burnt through US$92m last year, which is 4.2% of the company's market value. 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.

So, Should We Worry About AST SpaceMobile's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way AST SpaceMobile is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Separately, we looked at different risks affecting the company and spotted 2 warning signs for AST SpaceMobile (of which 1 makes us a bit uncomfortable!) you should know about.

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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.

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