Here's Why We're Not At All Concerned With Full Truck Alliance's (NYSE:YMM) Cash Burn Situation

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Full Truck Alliance (NYSE:YMM) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Full Truck Alliance

Does Full Truck Alliance 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. Full Truck Alliance has such a small amount of debt that we'll set it aside, and focus on the CN¥26b in cash it held at June 2022. Importantly, its cash burn was CN¥255m over the trailing twelve months. That means it had a cash runway of very many years as of June 2022. 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. Depicted below, you can see how its cash holdings have changed over time.

Is Full Truck Alliance's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Full Truck Alliance actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. As it happens, shareholders have good reason to be optimistic about the future since the company increased its operating revenue by 59% over the last year. 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 Hard Would It Be For Full Truck Alliance To Raise More Cash For Growth?

While Full Truck Alliance's revenue growth truly does shine bright, it's important not to ignore the possibility that it might need more cash, at some point, even if only to optimise its growth plans. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Full Truck Alliance's cash burn of CN¥255m is about 0.5% of its CN¥52b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Full Truck Alliance's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Full Truck Alliance's cash burn. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. 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. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Full Truck Alliance that investors should know when investing in the stock.

Of course Full Truck Alliance 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.