Is Cheetah Mobile (NYSE:CMCM) In A Good Position To Deliver On Growth Plans?
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Cheetah Mobile (NYSE:CMCM) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Cheetah Mobile
When Might Cheetah Mobile Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Cheetah Mobile had cash of CN¥1.7b and no debt. Importantly, its cash burn was CN¥431m over the trailing twelve months. Therefore, from December 2022 it had 3.9 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
Is Cheetah Mobile's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Cheetah Mobile actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. While it's not that amazing, we still think that the 6.7% increase in revenue from operations was a positive. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Cheetah Mobile has developed its business over time by checking this visualization of its revenue and earnings history.
Can Cheetah Mobile Raise More Cash Easily?
Notwithstanding Cheetah Mobile's revenue growth, it is still important to consider how it could raise more money, if it needs to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
In the last year, Cheetah Mobile burned through CN¥431m, which is just about equal to its CN¥452m market cap. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
How Risky Is Cheetah Mobile's Cash Burn Situation?
On this analysis of Cheetah Mobile's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Cheetah Mobile has 4 warning signs (and 1 which is concerning) we think you should know about.
Of course Cheetah Mobile 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.
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