Just because a company isn’t making money doesn’t mean the stock will go down. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
Given this risk, we thought we would examine whether Zwipe (OB:ZWIPE) shareholders should be concerned about its consumption of cash. For the purposes of this article, we will define cash burn as the amount of money the business spends each year to finance its growth (also known as negative free cash flow). We will start by comparing its cash consumption with its cash reserves in order to calculate its cash trail.
Our analysis indicates that ZWIPE is potentially undervalued!
How long is the Zwipe cash trail?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. As of June 2022, Zwipe had 110 million kr in cash and had no debt. Importantly, its cash burn was 96 million kr in the last twelve months. This means that it had a cash trail of around 14 months in June 2022. Notably, one analyst predicts that Zwipe will break even (at a free cash flow level) in around 2 years. This means that unless the company reduces its cash burn quickly, it may well be looking to raise more cash. You can see how his cash balance has changed over time in the image below.
How is Zwipe’s cash burn changing over time?
While it’s good to see that Zwipe has already started generating revenue from operations, last year it only produced 1.4 million kr, so we don’t think it’s generating revenue significant at this stage. Therefore, for the purposes of this analysis, we will focus on how cash burn is tracked. Over the past year, its cash burn has actually increased by 78%. While this increased spending is undoubtedly intended to drive growth, if the trend continues, the company’s cash trail will shrink very quickly. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How hard would it be for Zwipe to raise more money for growth?
Given its cash-burning trajectory, Zwipe shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
Zwipe has a market cap of 286 million kr and burned 96 million kr last year, or 33% of the company’s market value. That’s a pretty notable cash burn, so if the company were to sell stock to cover another year’s cost of operations, shareholders would suffer costly dilution.
How risky is Zwipe’s cash burn situation?
On this analysis of Zwipe’s cash burn, we think its cash trail was reassuring, while its growing cash burn worries us a bit. A real bright spot is that at least one analyst predicts the company will break even. We don’t think its cash burn is particularly problematic, but after considering the range of factors discussed in this article, we think shareholders should monitor its evolution over time. Taking a deeper dive, we spotted 5 warning signs for Zwipe you should be aware, and 2 of them are concerning.
Valuation is complex, but we help make it simple.
Find out if Zwipe is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.